February 2021 Financial Markets Update

Summary

1. The thesis of a strong global cyclical growth phase has underpinned our outlook for USDCAD over the past year and
   that theme has largely played out: Commodity prices are stronger, fiscal stimulus has increased, and vaccine rollouts
   have (mostly) surprised to the upside.
2. This has led to growth projections being upgraded significantly from earlier this year and no more so than from the
   Bank of Canada who became the first major G10 central bank to adopt a hawkish stance at their recent April policy
   meeting.
3. In contrast, the Fed has remained on the sidelines which has led to CAD rallying to three-year highs. Given CAD’s
   leverage to commodity prices, high positive correlation to global growth, and strong housing market we expect the
   BoC to remain under pressure to maintain a vigilant outlook on interest rates relative to other major central banks in
   the coming years.
4. Furthermore, the USD remains under longer-term structural pressure from record trade and budget deficits - deficits
   that imply a weaker USD as the US imports more than it exports, and spends more than it brings in.
5. As a result, we continue to see CAD appreciation as the most probable outcome and move our USDCAD targets
   lower with a 2021 year-end target of 1.1700.
6. Key risks are US growth outperformance pulling the Fed off the sidelines and pushing US rates higher, and a quicker than anticipated supply response across commodity markets particularly in copper and oil.