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The Canadian dollar closed 2020 near a three-year high versus the US dollar. Though loonie appreciation has been driven mainly by the widespread weakness of the USD, economists at the National Bank of Canada expect the next leg of its appreciation to be fuelled by commodity prices. The USD/CAD target for year-end 2021 is 1.20. 

Key quotes

“Though loonie appreciation in 2020 was driven mainly by USD weakness, we expect the next leg of its strengthening against the greenback to be fuelled by commodity prices and by a potential narrowing of Canada-US interest-rate spreads. Though some pundits have voiced concern about renewed speculator interest in the CAD, we doubt very much that this would cause the Bank of Canada to cut its interest rates. If anything, net-long speculative positions in the loonie remain modest by historical standards given the near-record prices of non-energy commodities produced in Canada.”

“Our model suggests that current fundamentals alone would have CAD trading at less than $1.25 to the USD. In these circumstances, there is no need for the Bank of Canada to lose sleep over the loonie’s recent strength.”

“At this juncture, our forecast for year-end 2021 is $1.20 to the USD, though the line to that target will not be straight.”