USD/CAD to nosedive to 1.24 by mid-year amid enthusiasm for commodities currencies – CIBC

Economists at CIBC Capital Markets expect to see further loonie gains in the coming months, but the Bank of Canada is set to out-dove the Federal Reserve and the Canadian dollar will shed some strength in the second half.

Key quotes

“Given higher levels of crude than previously assumed, and the persistence in the CAD’s correlation with movements in the broader USD index, we now see scope for an appreciation in the C$ over the next few months, with USD/CAD expected to sit near 1.24 at mid-year, and likely testing even lower levels in the interim.” 

“We still see the loonie giving up ground late this year and into 2022. Having seen a larger contraction in 2020, Canada has a tighter set of public health constraints in Q1, and a lag in vaccinations will widen the economic gap to the US in the first half of this year. Canada outgunned the US on fiscal stimulus in 2020, but the US looks set to deliver a proportionately larger boost this year.”

“In part to quell C$ gains that it views as a drag on trade, the BoC will likely try to reinforce its dovish messaging at future announcements, noting that its framework is flexible in terms of allowing inflation to run above the 2% target on a temporary basis. In contrast, the Fed is set to change its tune later this year, and will ultimately bring forward its tightening by a full year. That should help cool the loonie’s fires, as will a bit of retracement in energy prices as OPEC+ supply rebounds.”