BofA: We revise USD/CAD forecasts lower for the medium term

Bank of America has lowered its USD/CAD year-end forecast from 1.40 to 1.38, citing overly optimistic CAD pricing in April. While the pair may consolidate near 1.40 in the near term, BofA sees medium-term downside to 1.35 and recommends a 1-year RKO (reverse knock-out) put to express that view.

Key Points:

• Revised Forecast: USD/CAD is now expected to end 2025 at 1.38 (previously 1.40), with potential to reach 1.35 in the medium term.

• Drivers of CAD Strength: April’s rally was fueled by a BoC rate cut pause, expectations for fiscal expansion, and anticipated investment inflows—factors BofA believes may have driven temporary CAD overvaluation.

• Near-Term Outlook: BofA sees USD/CAD trading sideways around 1.40 over the next two quarters before gradually declining.

• Trade Strategy: A 1-year RKO put is favored to cheaply express a bearish view while taking advantage of current skew pricing.

• Macro Risk: The main risk is a North American recession in 2025, which would trigger renewed USD strength and invalidate the trade.

Conclusion:

BofA remains moderately bearish USD/CAD into 2025, targeting 1.35 medium-term, but sees near-term consolidation. Their preferred expression is a cost-efficient options strategy, allowing participation in a slow USD decline without overexposing to short-term volatility.

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This article was written by Adam Button at www.forexlive.com.