USD/CAD to trade at 1.36 by end-2021 as weak Canada’s trade fundamentals surface – CIBC

The loonie has been carried stronger than expected in the past month by general USD weakness. Katherine Judge and Avery Shenfeld from CIBC Capital Markets expect USD/CAD to trade at 1.30 by year-end and to recover to 1.32 in the first quarter of 2021. However, they forecast the pair at 1.36 by end-2021 due to weak Cadanian trade fundamentals.

Key quotes

“It appears that the negatives for CAD, including a wide current account deficit and soft oil prices relative to prior to 2015, will largely be overlooked until the trend to a weaker USD has run its course. The current account deficit will get a temporary benefit from a narrowing in the travel deficit due to frozen cross-border tourism.”

“With central bank target rates globally largely expected to stay at current levels through next year, currencies could become more sensitive to small moves in short rates.” 

“The weakness in Canada’s trade fundamentals should only come to the forefront in the latter part of 2021 when the run against the USD might have run its course. The Bank of Canada could end up slightly lagging the Fed on rate hikes with an eye of undoing some loonie strength and allowing exports to take a larger share of growth, thereby reducing the dependence on debt-driven housing or consumption. We see USD/CAD ending 2021 at 1.36 as a result.”