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The Canadian dollar went full circle in the past month, reacting mostly to global risk sentiment and its impact on the USD. In the near-term, the loonie remains resilient but a more dovish Bank of Canada (BoC) could see the CAD losing ground in 2021, economists at CIBC report. 

Key quotes

“A more pessimistic view on global growth as virus cases escalated and US stimulus was delayed sent USD/CAD back to the 1.33 level. That’s a weaker CAD than the starting point of the year, but not weak enough to support Canadian exports in the medium-term. Look for CAD to remain resilient into the first half of 2021, and then give up ground. 

“The BoC’s October forecasts showed a less pessimistic view for 2020 growth relative to the July projections, reflecting unexpected strength in the third quarter. However, that is all water under the bridge, as the outlook for the final quarter of the year has deteriorated with the surge in Covid cases. The Bank still sees a negative output gap at the end of 2022, and inflation therefore not sustainably reaching 2% by then.” 

“Our more optimistic forecasts for Canadian and US growth in 2022-23 have both the Fed and the BoC hiking in 2023. That’s not out of line with the BoC’s messaging, but it’s a year sooner for the US than what the Fed is signaling or the market expects. Indeed, we see the BoC letting the Fed take the first move which will work to push US yields above those in Canada and thereby steer the Canadian dollar a bit weaker, to benefit export competitiveness. Look for CAD to soften in the latter half of next year as markets sense that the BoC can be even more patient than the Fed.”