USD/CAD to pierce the 1.20 psychological hurdle – SocGen

The Federal Reserve will not be the first of the G10 central banks to tighten policy as the Bank of Canada cannot wait until 2023. Consequently, USD/CAD will trade below 1.20 eventually, according to economists at Société Générale.

The loonie is cheap relative to oil and rates

“Relative to its two biggest drivers, US-Canadian rate spreads and the price of oil, the USD/CAD exchange rate has pretty consistently looked higher than it should in recent years. Unlike many crosses, however, this is one that didn’t look odd in the spring of 2020 because oil prices collapsed. However, as they rise, USD/CAD really ought to be under 1.20, and we’re inclined to remain short as a result – for now.”

“Threats to a bullish USD/CAD view are 1) weaker oil prices; 2) the CAD being more sensitive to China and the yuan, which has been strong even as the Chinese economy slows signs of slowing; we would be nervous if the yuan were to weaken; and 3) risk aversion more broadly as the Fed inches towards a ‘proper’ change in monetary policy.”

“So far, the Bank of Canada has been reluctant to use monetary policy to tame housing, but that may (should) change, and it may also give the CAD more rate-sensitivity. If the BoC tightens earlier than the Fed, despite the latter being ‘in the news’ currently, then that may be the catalyst for USD/CAD’s final hurrah below 1.20.”