USD/CAD: Likely drift back into the 1.30s in order to maintain competitiveness - CIBC

Analysts at CIBC, see that a partial recovery in global oil prices would allow the Bank of Canada to hike twice in the first half of 2019, giving the loonie a temporary rebound. But they warn that slowing housing activity leaves the economy in need of the export lift from a competitive exchange rate, and BoC rates will peak well below US levels. They forecast USD/CAD at 1.30 during the first quarter and at 1.32 in the third quarter of next year. 

Key Quotes: 

“Aside from a huge November job gain in the notoriously volatile labour force survey, Canadian economic news has fallen well short of what we’ve seen stateside, and housing is tilting towards being a drag on growth ahead.”

“So the risks to our Bank of Canada call lean towards seeing only one more move as opposed to three. Relative to expectations for a protracted period on hold, even one first half rate hike, which would inevitably build expectations for a follow up, would propel a temporary move in the Canadian dollar to the 1.30 mark, particularly if the Fed takes a pause in Q1 as we expect."

“CAD will likely drift back into the 1.30s in order to maintain competitiveness. The Bank of Canada is looking for exports and related capital spending to step up as a substitute for housing, but Canada’s real export volumes have looked lacklustre for some time. A cheaper exchange rate may well be needed on a longer term basis to attract expansions. But for now, we see that trade vulnerability being played out in a generally range-bound dollar-Canada exchange rate.”