USD/CAD to surge above 1.30 next year as the Fed will hike more than the BoC – CIBC
11.11.2021, 13:18

USD/CAD to surge above 1.30 next year as the Fed will hike more than the BoC – CIBC

Markets have overpriced Bank of Canada (BoC) action in 2022, and underestimated the Federal reserve post-2022. A recalibration will leave the CAD out of favor with investors, economists at CIBC Capital Markets report.

Tempering of market BoC optimism to unravel CAD gains

“With the BoC redefining the output gap to exclude capacity temporary offline due to supply chain and other disruptions, we pulled forward our forecast for BoC tightening, and we now see the Bank raising rates starting in Q3 2022, with an additional 25bps hike in Q4, and 75bps of hikes in 2023. But that remains well below what the market has priced in.”

“With the US seeing more wage and price inflation, and ahead of Canada in its GDP recovery, we have the Fed hiking a bit more than the BoC (150bps in total) over 2022-23.”

“We see USD/CAD drifting above the 1.30 mark next year, as it becomes clear that Canada's central bank will not be outgunning the Fed, and as oil prices retreat from recent highs.”

“Softer crude prices and a return to Canada's usual travel deficit as tourism restarts will weigh on the country's trade balance, which has been supportive for the loonie in recent quarters.”

 

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