USD/CAD expected to surge on stronger USD

The USD/CAD pair is trading at 1.3446 at the time of writing, it is therefore higher by some 0.41%. the pair has travelled lower over the last month driven by the broad-based setback to the US dollar and the rebound in oil supporting the Canadian counterpart. Analysts forecast USD/CAD at 1.35 in a one-month period and at 1.37 in six months.

The US dollar’s rebound is one important factor, plus the notion of relative monetary policy. Bank of Canada has turned to an “on-hold” stance while traders expect the Fed to deliver an additional 25bp hike. Markets price a more aggressive cutting cycle from the Fed in H2 which we think is overdone.

Broader USD strength for the year ahead supports the idea that the Canadian dollar is in a relatively strong position compared to peers which limits the topside potential in the USD/CAD pair. While the Canadian housing market remains a threat, analysts still think the growth back-drop and the energy-reliance make for a much better cocktail than found in most other asset markets.