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The new guidelines for US monetary policy coupled with a stronger-than-expected Canadian economic rebound in Q3 provided support to the CAD in August. Despite the outperformance of the Canadian economy relative to the US and Ottawa’s commitment to keep generous income support in place through year-end, economists at the National Bank of Canada remain cautious on commodity-related currencies in the run-up to the US election. They have a USD/CAD short-term target of 1.36 and a new 12-month view of 1.28, down from 1.30.

Key quotes

“What’s driving the demand for the CAD? The change in US monetary policy has certainly helped. And hurricane-related shutdowns in US production helped keep oil prices (WTI) above $40/barrel. This at a time of surging lumber demand and strong metals prices. These developments, coupled with Ottawa’s pledge to maintain generous income-support programs for households through year-end, have boosted consumer confidence and spending.”

“The Canadian economy is set to outgrow the U.S. in the second half of 2020. Though the growth differential will be constructive for the CAD, we don’t think it will be enough to strengthen the currency in the coming months. Washington needs to deploy a new round of fiscal stimulus before the loonie will appreciate further.”

“We continue to expect the Canadian dollar to soften against the greenback in the run-up to the US presidential election. Looking beyond that point, we see the USD/CAD pair falling to 1.28 as the Fed’s reflation policy gains traction with more support from Washington.”


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