The Canadian Dollar (CAD) had a strong showing in February, emerging as the third best performing currency amongst the G10 currencies. However, according to economists at MUFG Bank, this outperformance will be short-lived, and the CAD is likely to underperform against other non-USD G10 currencies later in the year.
In the near term though, the CAD is expected to continue to be influenced by external factors rather than internal factors. Stronger domestic data but weaker inflation are expected to ensure that the Bank of Canada (BoC) maintains its wait-and-see approach, leading to the USD/CAD rate to be more heavily driven by external factors. Given that 2-year US Treasury (UST) bond yields are at cyclical highs and that there is hawkish rhetoric from the Federal Reserve (Fed), the USD/CAD rate is expected to be prone to upside risks in the short term before the CAD can recover.
MUFG Bank’s economists anticipate slower GDP growth in the US later in H2, which will likely see the USD/CAD rate drop, leading to the CAD underperforming against other non-USD G10 currencies.
Looking at specific exchange rates, MUFG Bank has forecasted the following rates for the Canadian Dollar:
– USD/CAD: Q1 2023 (1.3600), Q2 2023 (1.3500), Q3 2023 (1.3400), Q4 2023 (1.3200)
– EUR/CAD: Q1 2023 (1.4280), Q2 2023 (1.4580), Q3 2023 (1.4740), Q4 2023 (1.4780)
– CAD/JPY: Q1 2023 (100.00), Q2 2023 (98.520), Q3 2023 (97.010), Q4 2023 (96.210)
Despite the expected underperformance of the CAD, it is important to note that the currency has been on a steady upward trajectory for the past year, thanks in part to the strong recovery in commodity prices. The Bank of Canada has also been more optimistic about the economic recovery, projecting GDP growth of 6.5% for 2021, which is higher than its previous estimate of 4.0%.
However, the resurgence of COVID-19 cases and the emergence of new variants remain key challenges to economic recovery in Canada. The country has also been lagging behind the US and the UK in terms of vaccine rollout, which could further delay the reopening of the economy.
Additionally, the Canadian housing market has been a source of concern, with housing prices surging to record highs, leading to fears of a potential housing bubble. The government has introduced measures to cool down the market, but it remains to be seen whether these measures will be effective in preventing a housing crash.
Overall, despite the short-term underperformance that is expected for the CAD, the long-term outlook for the currency remains positive, provided that the economy continues to recover and policy measures are put in place to address the challenges it faces. As always, it is important for investors to keep an eye on developments both in Canada and globally, as these can have significant impacts on currency movements.
