USD/CAD: Loonie's resilience to show through in outright appreciation later in the year – MUFG

During May, the Canadian dollar strengthened versus the US dollar from 1.2820 to 1.2657. Economists at MUFG Bank expect the loonie’s resilience to continue throughout the rest of the year.

CAD gains could stall later in 2023

“Crude oil prices are set to remain elevated before falling from higher levels before year-end and the Bank of Canada is likely to at least match the Fed’s rate tightening actions. That is more likely following the inflation data in Canada. All three core annual inflation readings the BoC monitor were higher than expected. The data increases the likelihood of two 50bp rate hikes at the meetings in June and July.” 

“While CAD should recover as the US dollar weakens as the Fed pulls back from tightening to the extent as currently priced, the scope for CAD gains will become more limited given the household sector is more leveraged and hence more sensitive to interest rate increases.”

“Household sector deleveraging post-GFC was not as large as in the US and house price declines could have a more notable impact in slowing economic growth in 2023. That suggests CAD gains could stall later in 2023.”