USD/CAD likely to appreciate towards 1.31 by March 2018 – Lloyds Bank

The U.S. dollar has rallied against the Canadian dollar from its September low, briefly peaking at multi-month high above 1.29, noted Lloyds Bank in a research report. The broadening of the U.S. – Canadian interest rate differential has played an important role in this move.

The market has upwardly revised its U.S. interest rate expectations with a 25 basis point rise in the fed funds rate in December now ‘fully-priced’. Meanwhile, it pushed back its expected timing of future Canadian policy rate tightening after the BoC Governor Poloz’s comments indicating that the policy rates path would not be “mechanical”.

“Looking ahead, our expectations for US policy rates next year are in-line with the implied ‘dot plot’ path and well ahead of current market pricing. As such, we see scope for further interest rate divergence, which should provide additional upward momentum to USD/CAD”, sad Lloyds Bank.

Surprisingly, the recent sharp rise in oil prices has given little support to the Canadian dollar. Oil prices rose more than 15 percent from their October low. Oil is likely to re-establish itself as a main driver of the Canadian dollar; however, the timing of this is unclear.

“We forecast USD/CAD to appreciate towards 1.31 by Mar-18, before pulling back to 1.24 by end-2018”, added Lloyds Banks.

At 20:00 GMT the FxWirePro's Hourly Strength Index of Canadian Dollar was bearish at -99.259, while the FxWirePro's Hourly Strength Index of US Dollar was neutral at 5.44029. For more details on FxWirePro's Currency Strength Index, visit http://www.fxwirepro.com/currencyindex

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