USD/CAD to rise further to 1.30 by 3Q17 and retreat to 1.25 next year, says Scotiabank

The Canadian dollar (CAD) has been on a tear since the U.S. dollar topped around 1.38 in May. The run of CAD-positive news has moved the currency forcefully—and comprehensively—higher. Oil costs have solidified, Canadian economic data has been supportive, with economic reports, for the most part, running firmly in front of expectations, and yields have ascended to mirror the Bank of Canada's (BoC) as of late uncovered hawkishness, Scotiabank reported.

The CAD has moved a tad higher beyond its early 2016 peak to achieve its most elevated level in somewhere in the range of two years.  Also, the bank said that it remains by and large constructive on the outlook for the CAD yet we feel that the CAD's rally may turn around unassumingly in the close term with a ton of uplifting news considered into the exchange rate now.

While investors have clearly under-estimated the strength of the Canadian economy, some clear problems remain. Growth is strong but unbalanced. Government officials have started to express discrete concern about the BoC’s tightening path and its impact on the economy, especially considering that rate-sensitive sectors like housing and consumer spending are doing much of the economic heavy lifting at the moment.

Moreover, a broad-based measure of the CAD’s effective exchange rate performance shows the currency has appreciated around 16 percent since January 2016, which will tighten domestic monetary conditions somewhat above and beyond any additional rate increases from the BoC, the bank noted in its research note.

The Scotiabank forecast in its research note that the USDCAD is looking somewhat oversold at the moment and seasonal patterns suggest the USD will retain a defensive posture until later in Q4 at least.

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