USD/CAD: Loonie's Sensitivity to US and Canadian Factors
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USD/CAD: Loonie affected by the US as much as by Canada
The Bank of Canada resumed tightening with two hikes in June and July, and we cannot exclude another increase in September. However, the softer June US CPI means that there is less external pressure to hike as chances of a Fed move have declined.
CAD remains quite tied to the domestic US story, and therefore to the USD itself. Should we see a fully-fledged risk-on rally on the back of a clear softening in US data, expect CAD underperformance compared to other pro-cyclicals.
A more conservative scenario, where markets have to “hold their horses” on the USD decline/Fed peak story for a bit longer can make CAD stand out. In all cases, the attractive volatility-adjusted carry means USD/CAD can hit 1.25-1.27 by mid-2024.
