USD/CAD likely to reach 1.40 level by mid-2017, says Scotiabank

The Canadian dollar performed relatively well in the early stages of 2017; in fact, the Bank of Canada Governor Stephen S. Poloz was forced to remind investors that broader CAD strength would hurt Canadian exporters which would compound Canada’s growth challenges and leave the central bank more likely to sit on its hands while the Fed tightened policy in the months ahead.

Investors have perhaps been persuaded that recent domestic data trends, especially on the trade and employment fronts, spelled better times ahead for the Canadian economy. It is important to keep expectations in check, however. Recent job trends have been heavily skewed by exceptionally strong job growth in December and January, which may unwind somewhat in the months ahead.

Trade data has improved, with the late 2016 headline numbers reporting trade surpluses for the first time since 2014, but underlying export volume growth remains weak (-1.1% in the December year). Firmer crude oil prices, reflecting OPEC’s production discipline, have helped support the CAD.

However, scope for additional crude oil gains appears limited for now, we think, and broader trends in commodity prices are tracking a somewhat weaker in the short run at least, with the TR-CRB index easing to its lowest levels since November.

"Our fair value model for USDCAD, which incorporates US-Canadian short-term interest rate differentials and crude oil prices, suggests the big dollar remains quite significantly undervalued relative to the CAD; the model currently implies an equilibrium level near 1.3450. We continue to expect USDCAD will reach the 1.40 level through the middle of the year before USD gains moderate again," Scotiabank commented in its recent research report.