USD/CAD: Loonie to rise further but more moderately than other G10 currencies – MUFG

Analysts at MUFG Bank see the USD/CAD pair heading lower over the next quarters, reaching 1.3000 during the second quarter of next years. They see the Canadian dollar rising at a more moderate pace than other G10 currencies versus the US dollar. 

Key Quotes:

“The Canadian dollar, like all G10 currencies, advanced versus the US dollar in July but CAD was a laggard with the advance the least of all G10 currencies – gaining 1.2%. The underperformance of CAD we believe reflects certain factors that have highlighted here before and why we believe CAD appreciation going forward will be more moderate than other G10 currencies.”

“With Canada bordering the US, the macro backdrop there will always play a role in CAD performance and USD weakness of late reflects increased concerns over the economic outlook due to the escalation of COVID. On that front, COVID cases have started to go in the wrong direction in Canada too.”

“The BoC in its update assessment in July outlined a view of prolonged “recuperation” after an initial phase of recovery with the slack created leading to “significant deflationary pressures”. Unlike in the US where the Fed’s balance sheet is shrinking, the BoC’s balance sheet expanded to CAD 540bn from CAD 528bn at the end of June – we expect CAD underperformance to continue.”