USD/CAD: Loonie to recoup August losses – MUFG

The USD/CAD pair will likely move lower over the coming quarters according to analysts at MUFG Bank. The forecast the pair at 1.2500 by the end of 3Q, at 1.22 by 4Q, and at 1.20 by the first quarter of next year. 

Key Quotes:

“When financial market conditions turn less favourable on global growth concerns, like what happened in August, currencies that have rate hikes priced can often underperform as those expectations get pared back. Prior to the bout of global growth concerns, the market was priced for the end of tapering and two rate hikes by around Sept 2022. Around 10bps of tightening has been taken out of the CAD rates market but this largely happened in July when the BoC signalled a greater tolerance to higher inflation”

“A snap election was called by PM Trudeau for 20th September. A poor showing in the polls so far has seen probability estimates of PM Trudeau winning a majority of seats falling from above 50% to just 8%. Emerging signs of a 4th COVID wave have given credence to complaints of this being an unnecessary time for an election.”

“We do not expect the election to have much bearing on CAD which will be influenced more by BoC rate hike timing; the Fed’s timing on QE tapering; external market conditions in general and crude oil prices. We are assuming the BoC remains on track for rate hikes next year, with the weaker than expected Q2 GDP data in August unlikely to have much bearing on rate expectations, assuming COVID risks recede.”
 

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