CAD: Trough In 2017, Recovery In 2018: Where To Target?

The Canadian dollar is struggling with the tumbling price of oil. What’s next?

Here is their view, courtesy of eFXnews:

In our view, USD/CAD will be dominated by the trend in the ‘big dollar’ over the coming months. This is because Canadian domestic data has little impact on Canadian rates at the moment and because we do not expect much momentum in oil prices. The recent uptick in USD/CAD corrects some of the current undervaluation. We expect 2Y rate differentials to widen further by around 30bp by Q317 as the market prices in further Fed hikes. This should drive USD/CAD to 1.38, or slightly below the peak of 1.40 that we have been forecasting previously.

One reason to expect a slightly less weak CAD is that US stimulus expectations have subsided recently. Our economists do not expect fiscal stimulus to materialise until 2018, and it appears that some of the more USD-positive aspects of the tax reform, such as the border adjustment tax, are becoming more questionable. We also see limits to how much the Canadian policy rate can lag behind its US counterpart given the positive correlation between the Canadian and US economic cycles.