USDCAD: It's Still a Growth Story, The Redux.
February 2021 Financial Markets Update
A complete wrap-up across FX, interest rates, and energy commodities.
Our Financial Markets Team has come together to provide a USDCAD forecast. Overall, the team sees CAD as the best proxy to capture the global growth/reflation trade as well as a strong candidate to take advantage of the structural headwinds facing the USD—which show little sign of abating anytime soon.
- 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.
- 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
- 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.
- 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.
- 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.
- 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.