USD/CAD likely to fall by end-2018 to 1.25, says Lloyds Bank

The Canadian dollar continues to show a high degree of volatility. Through April and early May, it depreciated against the U.S. dollar to 1.38, mainly driven by the rising worries about Canada’s trading relationship with the U.S, the downgrading of Canadian banks by Moody’s and a subdued oil price.

But in recent weeks it has been amongst the best-performing G10 currencies. Key Bank of Canada speakers have shifted to a more hawkish tone, implying the central bank needs to “assess whether less stimulus is needed”. This caught the market off guard, with 2y-Canadian government bond yields rising to about 0.90 percent, noted Lloyds Bank in a research report. The Canadian dollar also rallied in response and the move can continue.

FX positioning data imply Canadian shorts are at a record high. This leaves the currency exposed to a possible squeeze that would deepen any move lower in USD/CAD. Moreover, crude oil is consolidating within its medium-term range, with upside risks to prices given expected inventory drawdowns later in 2017.

“These factors, in conjunction with a narrowing US-Canada interest rate differential, suggest there is scope for USD/CAD to fall to 1.25 by end-2018”, added Lloyds Bank.

At 22:00 GMT the FxWirePro's Hourly Strength Index of U.S. Dollar was neutral at -4.03931, while the FxWirePro's Hourly Strength Index of Canadian Dollar was slightly bearish at -71.3066 . For more details on FxWirePro's Currency Strength Index, visit http://www.fxwirepro.com/currencyindex

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