USD/CAD pair likely to continue to trade lower in medium-term

The Canadian dollar has strengthened over 6 percent against the U.S. dollar since peaking near 1.38 in early May. The decline in the USD/CAD pair has been mainly due to wide USD weakness, oil prices forming a base around USD 45 per barrel and the sharp rise in Canadian yields.

A shift in tone from the BoC has caused the latter. The Bank of Canada in July hiked its interest rate. The 2-year Canadian government bond yields surged above 1.15 percent after last month’s hawkish tone by Governor Poloz and Deputy Governor Wilkins.

The Canadian economic data have also come out strong. The latest Canadian labor market report indicated a drop in the jobless rate to 6.5 percent. Moreover, the retail sales and PMI data have performed better than expectations. According to Lloyds Bank, the USD/CAD pair is expected to continue to trade lower in the medium term towards 1.25 by the end of 2018.

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