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Analysts at MUFG Bank, see the USD/CAD moving to the downside in the months ahead, but with the loonie lagging behind other G10 currencies. According to them, the Canadian dollar appears modestly expensive relative to the price of oil.

Key Quotes:

“The Canadian dollar, like some of the other G10 currencies weakened towards the end of October almost fully reversing gains from earlier in the month. The reversal was driven by risk aversion on the back of the pick-up in COVID infections that is now resulting in wider restrictions, especially in Europe. Canada also reported a record one-day increase with the 7-day average also hitting a new high. The turn in risk also hit crude oil prices – NYMEX fell 11.0% reflecting the softening global demand outlook.”

“Year-to-date and half-year-to-date CAD is the 2nd worst performing G10 currency. As we have stated here before, the aggressive stance of the BoC is reason for us to expect CAD to continue to underperform in the G10 space. The expansion of the BoC’s balance sheet since the COVID crisis began amounts to 20% of GDP, compared to 14% for the Fed in the US and around 17% for the ECB.”

“Short-term rates also will not rise until the 2% inflation target is “sustainably achieved” which would not happen until 2023. This is of course an attempt to mimic the Fed’s guidance and should prove enough to ensure the pace of CAD recovery going forward is modest and contained.”