USD/CAD to trade in 1.20-1.30 range over next 12 months, says National Bank of Canada

A stronger-than-expected first half of the year prompts us to upgrade our Canadian GDP growth forecast for 2017 to 2.9 percent. Solid growth is being complemented by a healthy labor market, the latter creating jobs in numbers not seen in 7 years. That, coupled with the housing wealth effect ─ consumer credit growth is surging thanks in part to home equity lines of credit ─ is boosting consumption.

The national bank of Canada also raised calls for 2018 growth from 2.0 percent to 2.5 percent to reflect provincial fiscal stimulus in British Columbia but also in Ontario and Quebec ahead of elections in the latter two provinces. The improving outlook and growing financial stability risks associated with housing and household debt arguably take precedence over the problem of low inflation, and hence warrant tighter monetary policy from the Bank of Canada.

In light of the slightly more bullish call on Canada, the NBC now expect the Bank of Canada’s overnight rate to end 2018 at 1.75 percent, 25 basis points higher than in our previous forecasts. As such, we are a bit more optimistic about the Canadian dollar, now expecting USDCAD to trade in the 1.20-1.30 range over the next 12 months.

The sixth largest commercial bank in Canada has also raised targets for the euro to reflect an improved economic outlook on the old continent. So, the trade-weighted US dollar is likely to remain under pressure for a while longer. But the greenback could find renewed strength in 2018 if, as the commercial bank expect, the Fed surprises markets with a couple of interest rate hikes next year.

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