USD/CAD: Loonie’s profile softer as Fed races to higher terminal rate – CIBC

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Analysts at CIBC see the USD/CAD pair trading around 1.29 during the third quarter and rising toward 1.31  by year-end. They consider markets are overpricing tightening this year from the Bank of Canada and the Federal Reserve. 

Key Quotes: 

“A likely 75 bp hike by the Bank of Canada in July, and the potential for another move of that magnitude in September if we don’t see enough of an inflation deceleration by then, should be aggressive enough to allow USDCAD to remain around current levels over the next three months.”

“Contrary to market expectations, the BoC is unlikely to send Canada’s overnight rate beyond the Fed’s destination of 3.25%. Canada’s debtburdened households and mortgage renewals will see rate hikes weigh more on discretionary consumer spending in Canada. That points to a slightly lower terminal rate for the BoC overnight rate, although we’re leaning towards a 3% peak rather than our prior 2.75% after the May inflation data.”

“Markets appear to be overpricing both BoC and Fed tightening this year, but comparatively more for the BoC, and that recalibration will lead the CAD to end the year weaker, with USDCAD expected to reach 1.31 by then.”

“All told, look for USDCAD to reach 1.33 in early 2023, before recouping some of that ground further into the year as the USD loses favour globally.”