Analysts at CIBC, point out the Canadian dollar has been benefiting from a modest sort-rate spread between US and Canadian bonds. They forecast USD/CAD at 1.30 during the fourth quarter and at 1.32 by the first of next year.
Key Quotes:
“The loonie has been carried stronger than we expected in the past month by general USD weakness, alongside a positive spread in short rates. Oil prices, a traditional loonie driver, have moderated in recent weeks upon a resurgence of the virus in many countries, putting the demand outlook in jeopardy. 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.”
“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. On this front, the BoC is increasingly focused on purchasing longer-duration assets as shorter-term ones mature, amplifying the already modest positive shortrate spread for CAD.”
“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 USDCAD ending 2021 at 1.36 as a result.”
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