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The USD/CAD Forecast to Extend Higher by Rabobank, TD Bank

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USD/CAD is moving higher and traders should add to existing longs, say analysts at Canadian lender TD Bank.

“Against this uncertainty, we look for strength in USD/CAD to persist. The uncertain path of US business investment, dampened Canadian trade prospects and renewed prospects for a BoC rate cut in the coming months are key headwinds for the CAD,” said TD in a recent brief to clients.

They advocate “buying on dips” with an eventual target at 1.3370 and 1.3400 – current exchange rate is 1.3417.

The Dollar initial weakness after the news of Trump’s win was based on expectations that uncertainty would lower the chances of the Fed making December rate hike.

However, this proved to be a premature over pessimistic reaction, as Fed Fund Futures quickly priced back in a higher probability of a December hike, which rose to 76% by midday.

Trumps protectionist agenda all things being equal would also lead to a stronger dollar as it would reduce imports.

From Canada’s perspective TD is pessimistic as the Trump win means the outlook for the Canadian economy looks more negative.

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Without a fluid trade corridor to its affluent neighbour the prospects for CAD look decidedly bleak.

This suggests even more upside – possibility extending into the medium term - for the USD/CAD pair.

According to Office of the US Trade Representative, goods and services trade between Canada and the US totalled an estimates USD662.7 bln in 2015, making it one of the largest trading relationships in the world.

Last month the BoC revised lower its forecasts for exports over 2017 and 2018 “due to lower estimates of global demand, a composition of US growth that appears less favourable to Canadian exports, and ongoing competitiveness challenges for Canadian firms”.

"The BoC also admitted that the Governing Council actively discussed the possibility of adding more stimulus in its October meeting. Given concerns over the US/Canada trading outlook, speculation of further BoC easing is likely to growth and there is scope for USD/CAD to push back above 1.35 in the weeks ahead," saysJane Foley at Rabobank.