Bank of America Merrill Lynch Global Research discusses USD/CAD outlook and maintains a bullish bias, expecting prices to rise to 1.35 in 3Q, holding steady in 4Q and thereafter moderating to 1.32 by the middle of next year as risk premium compresses.
"The Canadian dollar has moderately weakened against the US dollar since late July, supported by higher market volatility and lower oil prices. Data in Canada remain solid, though we remain concerned that softening could lie ahead as trade policy risks have increased. We previously identified potential trade war escalation as a source of USD/CAD upside risk. This risk has become reality," BofAML notes.
"Although we assess cyclical fair value at about 1.31 (assuming a Fed-BoC policy rate differential of +25bp by early next year), we expect more overshoot on the back of a firmer overall USD, higher US-China trade policy risk, lack of progress on USMCA ratification and continuing external sector financing risks specific to Canada. Therefore, we think that the exchange rate will remain in a moderate uptrend over the next few months, overshooting levels we see as consistent with equilibrium over the economic cycle," BofAML adds.