USD/CAD should be north of 1.32, dips will be short-lived – TDS

The Bank of Canada (BoC) surprised with a 100 bps hike in July. In the view of economists at TD Securities, more policy aggression accelerates the perverse effect of higher rates on FX. The CAD is living on borrowed time, and the USD/CAD pair is set to trade above the 1.32 level.

The BoC is bringing forward the pain to the overly indebted consumer

“The BoC is far too late to this and front-loading rate hikes accelerates the perverse impact of higher rates on FX; that is, the higher that rates go the more that macro imbalances manifest in the currency. For the CAD, that means that Macklem is bringing forward the reckoning facing the overly indebted consumer.” 

“At this point, with 75 bps being the expected outcome for this meeting, the shock value of doing an extra 25 bps is relatively small. The question then becomes if the BoC will deliver another 100 bps for the next meeting. We have reservations about that. What today's surprise 100 bps hike does, however, is it raises the prospect of the Fed following suit.” 

“We highly doubt the CAD can hold its own versus the USD. By our measure, the CAD is the least short G10 currency against the USD. The CAD is also one of the most correlated currencies to global equities. We think the outlook for the latter is still very much challenged and combined with our cross-asset fair value measure suggesting USD/CAD should be north of 1.32 leaves us thinking that dips in the pair will be short-lived.”