Canadian Dollar Month Outlook (1 – 3 Months)– USD/CAD toward the highs

USD/CAD found its low in mid-May before bouncing sharply through the second half of the month. As it is noted in early May, the main drivers of the pullback appeared to be short-term, and had nearly run their course. According to RBC Capital Markets, the bounce in recent weeks as a re-establishing of the broader trend for the coming months, driven by the factors including: 

• 1) Monetary policy divergence. The BoC has taken on a firmly neutral message, and our economists expect the BoC to keep rates at 0.75% through to Q2 2016. Regardless of the exact timing of an eventual rate increase, the issue is that the BoC hiking cycle will considerably lag that of theFed, which is likely to begin in the second half of this year. 
  
  
• 2) Greater downside risk to Canadian activity. Q1 growth was even worse than anticipated, but what matters now is whether we begin to see a decent rebound in Q2, as the BoC has said they expect. The clear risk is that the rebound is more sluggish, which would weigh on rate expectations and CAD.
  
  
• 3) Oil has bounced, but no significant shift is anticipated in the larger macro outlook unless prices rise above the breakeven threshold for new oil sands projects (WTI above the mid-USD70s/bbl). The commodity analysts do not expect a strong rebound in oil prices (forecasting USD53/bbl average WTI in 2015).