USD/CAD: Mid-year target at 1.27 - NBF

Stéfane Marion and Krishen Rangasamy, analysts at the National Bank of Canada, expressed that amid a backdrop of decelerating domestic demand, there’s arguably little need for an aggressive monetary policy stance from the Bank of Canada but that won’t necessarily weaken the Canadian dollar. They see oil reasserting itself as the main driver of the Loonie. According to them USD/CAD could move closer to their mid-year target of 1.27. 

Key Quotes:

“After a rough 2018, the Canadian dollar is bouncing back nicely. The loonie advanced almost 4% against the USD in January, outperforming several other commodity currencies such as the Norwegian Krone, Australian dollar and New Zealand dollar.”

“Another channel through which the loonie could benefit this year is through capital inflows. Prior uncertainties may have been responsible for last year’s weakness in foreign purchases of Canadian securities. The roughly C$88 bn worth of net foreign purchases from January to November is the weakest 11-month inflow since 2013, with weakness in equities but primarily in bonds ─ foreigners were net sellers of C$-denominated bonds for the first time since 2003. But with a better outlook for the Canadian dollar (amid USD weakness) and possibly less uncertainty with regards to trade (once the USMCA is ratified by the U.S. Congress), foreign investors may find Canadian assets a bit more attractive.”

“The USMCA deal and trade in general are indeed crucial for Canada’s economic prospects in light of an expected moderation in domestic demand.”

“The influence of Canada-U.S. interest rate spreads on the loonie is waning, in sharp contrast with oil which is now reasserting itself as the main driver of the Canadian currency. If we’re right about further increases for WTI oil and unimpeded global trade flows, USDCAD could move closer to our mid-year target of 1.27.”