USD/CAD pair likely to fall in 2019 to 1.21

In recent months, the Canadian dollar has surprisingly failed to markedly strengthen against the U.S. dollars. Despite the easing of trade-related uncertainties and solid Canadian data, USD/CAD pair fell below 1.28, noted Lloyds Bank in a research report.

More recently, the reversal in Brent Crude prices has pushed the pair back to mid-range levels, around 1.31. As its October meeting, the Canadian central bank hiked its policy rates by 25 basis points to 1.75 percent. Subsequently, governor Poloz repeated that the need for future and gradual policy tightening and implied the economy’s ‘neutral’ rate sits between 2.50 percent and 3.50 percent.

“Following an impressive Q3 GDP growth release (3.1 percent y/y) and with the US labour market at its tightest in almost fifty years, the Federal Reserve is expected to continue raising the Fed funds rate”, said Lloyds Bank.

The market is widely pricing for a hike of 25 basis points in December and 50 basis points of tightening in 2019, taking the U.S. benchmark policy rate range to 2.75 percent to 3 percent. Given these dynamics, there appears to be limited scope for the two-year U.S.-Canadian interest rate differential to widen.

“Moreover, with our model-driven ‘fair value’ estimate suggesting the CAD is ‘undervalued’, we expect USD/CAD to fall over our forecast horizon”, added Lloyds.

At 19:00 GMT the FxWirePro's Hourly Strength Index of Canadian Dollar was neutral at -19.3154, while the FxWirePro's Hourly Strength Index of US Dollar was slightly bullish at 52.7483. For more details on FxWirePro's Currency Strength Index, visit http://www.fxwirepro.com/currencyindex