USD/CAD to struggle to break below 1.30 – MUFG

FXStreet Team FXStreet

The Canadian dollar continues to outperform amongst G10 currencies with USD/CAD still threatening to break below the 1.3000-level ahead of the US Presidential election. The Bank of Canada (BoC) policy update should be modestly CAD supportive, according to economists at MUFG Bank.

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Key quotes

“According to our calculations, the Canadian dollar has displayed the most bullish momentum over both the last three weeks and three months. However, we would argue that upward momentum is not stretched enough to provide a strong signal that there’s a high risk of a reversal lower.”

“The most likely scenario in the run-up to the US Presidential election is that USD/CAD continues to consolidate between 1.3000 and 1.3400. We do not expect today’s BoC meeting to reinforce the Canadian dollar’s upward momentum sufficiently for USD/CAD to break below 1.3000.”

“The Canadian dollar’s upward momentum has been supported by the robust initial bounce back for Canada’s economy following the COVID-19 shock. Consensus forecasts for GDP growth in Q3 have risen to an annualized rate of 45% although the pace of growth is then expected to ease back to around 6% in Q4. We expect the BoC to acknowledge the stronger economic recovery at today’s policy meeting.”

“The aggressive fiscal response and strong bounce back for Canada’s economy have eased some of the pressure on the BoC to deliver further stimulus. There has been no strong indication from the BoC it is ready to step up QE from the current pace of just over CAD5 billion/week. Those favourable developments continue to encourage a stronger Canadian dollar. However, we would caution that the loonie strength relative to the US dollar is starting to look overdone based on short-term fundamental drivers such as the price of oil and yield spreads. As a result, USD/CAD should continue to find it difficult to break below 1.3000.”

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