Is the Canadian dollar too strong for the BOC?

USD/CAD collapsed on the hawkishness of the BOC and the weakness of the US dollar. Has it gone too far? Here are two opinions:

Here is their view, courtesy of eFXnews:

USD/CAD: Loonie Strength To Send BoC To The Sidelines; Where To Target? – CIBC

CIBC FX Strategy Research argues that  while CAD strength could extend towards a temporarily closing in on 1.25, it will also be a key factor in  sending the BoC to the sidelines,  letting a Fed hike in December re-widen interest margins in favor of the USD.

“In the past, the BoC has signaled that the 1.25 level on USD/CAD  represents a headwind to export growth.  With home-building set to slow in the face of rate hikes and mortgage regulatory changes, the Bank is counting on exports as a source of growth in 2018

A six-month gap to the next rate hike after October should see the CAD pull back, even if oil regains some of its recent lost ground,” CIBC argues.

CIBC targets USD/CAD at 1.28 in Q3, and at 1.30 by year-end.  

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CAD: BoC Overly Optimistic: USD/CAD Oversold; Where To Target? – Barclays

Barclays Capital Research argues that the  BoC’s outlook seems overly optimistic,  and  the pace of normalization is likely to be data-dependent, with wage and price inflation in particular closely monitored.

“We expect an additional hike in Q1 18, although the upbeat BoC outlook has increased the probability of early action,” Barclays projects.

“Although central bank hawkishness supported CAD last week, the  USDCAD relative strength index indicates the pair is oversold and momentum to the downside looks stretched.

We continue to expect CAD weakness over the coming months as a subdued inflationary outlook does not imply a more aggressive rate hiking cycle relative to current market pricing, and forecast  USDCAD to reach 1.33 by year-end,” Barclays adds.

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