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Analysts at National Bank of Canada estimate the USD/CAD pair will trade at 1.38 in three months, at 1.36 in six and at 1.30 in twelve. They point out that weakness in equity markets is more likely to keep the US dollar on an upward trend over the coming weeks. 

Key Quotes:

“After falling to a multi-month low of 1.33 in June, USD/CAD is back above its 200-day moving average. This recent bout of weakness it not estranged to the rising geopolitical uncertainties (…) to which we must add the recent downgrade by Fitch for Government of Canada debt from AAA to AA+.”

“While it is clear that a reliance on foreign bond investors creates a vulnerability to the currency, it’s likewise important to recognize the importance of the Bank of Canada QE/CE programs, which not only help keep rates low/spreads tight (and thus debt affordable) but absorb much of the current surge in net federal and provincial borrowing that comes from unprecedented deficits. In other words, we do not perceive the Fit downgrade to be as lethal to the CAD as those that happened in the 1990s.” 

It is unfortunate that the Fitch downgrade occurred at a time when a potential dampening demand for oil because of tightening lockdown restrictions in some large US states because of COVID-19 cases. Also, we cannot ignore the fact that despite the new Canada-US-Mexico trade agreement, the US is contemplating imposing tariffs on Canadian aluminum. In light of all the above factors, we set our three-month target USD/CAD at 1.38.”