The US Dollar to Canadian Dollar (USD/CAD) exchange rate remains close to multi-year highs, trading around 1.4195 after rallying almost 3% during June.
Citi has upgraded its USD/CAD forecasts, raising its three-month target to 1.43 from previous estimates and lifting its six to 12-month forecast to 1.42, reflecting a more constructive outlook for the US Dollar.
The bank believes policy divergence remains the key driver, arguing there is “asymmetric scope for policy divergence” as the Federal Reserve signals a willingness to tighten while the Bank of Canada remains constrained by subdued core inflation and uncertainty surrounding the USMCA trade agreement.
Citi also expects fading energy tailwinds and slowing foreign investment to weigh on the Canadian Dollar. The bank argues that higher hedging costs and weaker capital inflows should continue to support USD/CAD over the medium term.
Scotiabank is slightly more cautious in the near term.
While it notes the Canadian Dollar has found some support as US-Canada yield spreads have narrowed from recent extremes, it believes those spreads remain historically wide and continue to favour the US Dollar.
From a technical perspective, Scotiabank says USD/CAD’s “very overbought trend higher is poised to moderate somewhat”, suggesting the recent rally may pause even if a broader reversal has yet to develop.
Overall, Citi remains bullish on USD/CAD over both the three-month and 12-month horizon, while Scotiabank believes the Canadian Dollar has scope to stabilise in the short term as interest-rate differentials stop widening.
