USD/CAD: Gradual strength for the loonie ahead but long-term risk emerge – MUFG

Analysts at MUFG Bank, explained that the Canadian dollar outperformed during August, but not due to the recovery in crude oil prices. Actually, they see the loonie looking expensive relative to the price of oil. They forecast USD/CAD at 1.3200 by the end of the third quarter and at 1.3100 by the end of the year. 

Key Quotes:

“The Canadian dollar, like all G10 currencies, advanced further in August but the advance was more impressive with CAD the 3 rd best performing G10 currency behind NOK and AUD.”

“The outperformance for CAD was as much about domestic factors. In particular, economic data pointed to the Canadian economy recovering faster than expected.”

“Reinforcing CAD gains was the change in government that points to continued aggressive fiscal stimulus ahead. Bill Morneau resigned as finance minister and was replaced by Chrystia Freeland. PM Trudeau suspended parliament and will give a speech on 23rd September outlining the fiscal and economic strategy ahead. The government looks to be abandoning fiscal prudence (hence Morneau’s resignation) to take advantage of extraordinary low rates globally due to the pandemic to extend the period of fiscal expansion over the medium-term. While this is perhaps positive for growth and expectations over the short-term, it is not necessarily positive for CAD over the medium to long-term. Household indebtedness is already high.”

“We are forecasting further gradual CAD strength ahead but are mindful of longer-term downside risks from fiscal profligacy.”