"In the global pecking order, CAD is the 2nd best performing G10 currency on the year, and we think Canada's currency fundamentals justify that,"
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Analysts at Bank of Montreal's capital markets division say the Canadian Dollar is underpinned by the strongest fundamentals in the G10 and this should keep it supported over coming months.
"In fact, we consider Canada's raw currency fundamentals to be better than the US's," says Greg Anderson, Global Head of FX Strategy at BMO Capital Markets.
The assessment comes in the wake of the surprising 100 basis point rate hike delivered by the Bank of Canada (BoC) on Wednesday that took the cash rate to 2.5%.
The surprise decision initially spurred the Canadian Dollar higher and sent the Pound to Canadian Dollar exchange rate to a fresh 10-year low at 1.5366.
Yet, the U.S. Dollar remains resistant and it actually hit its own highs against the Canadian Dollar at 1.3233 in the hours that followed the BoC decision.
"The USD is the global numeraire and we are in a moment of sharp retrenchment," says Anderson.
"In the global pecking order, CAD is the 2nd best performing G10 currency on the year, and we think Canada's currency fundamentals justify that," he adds.
BMO Capital says Canada's combination of monetary policy, balance of payments, economic growth, and political fundamentals are the best in the G10.
"We consider Canada's raw currency fundamentals to be better than the US's," says Anderson.
However the Dollar's almost irresistible advance is not yet over and USD/CAD will likely spend some time above 1.30 according to BMO Capital.
Above: USD/CAD daily.
BMO Capital now projects USD/CAD will stay in the low 1.30s for the next 3 months and return below 1.30 by the year's end. Our 1Y outlook for USDCAD is 1.24.
"We consider the USD strength of the moment to be a relatively extreme overshoot of fundamentals, so we refuse to project it extending for more than 6 months," says Anderson.
Concerning the BoC, economists at BMO see the basic rate hitting 3.50% by year-end as the BoC keeps pace with the Fed, something not many other central banks in the G10 will achieve.
Indeed, this could well ensure the Canadian Dollar maintains its number 02 spot in the G10 rankings and implies the potential for further strength against the likes of the Euro and Pound.
BMO also sees a substantial tailwind for the Canadian Dollar resulting from its oil exports which have helped boost the country's terms of trade.
This is particularly relevant against net energy importers such as the Euro and Yen.