BMO Capital Forecasts Further Upside to the Canadian Dollar

Analysts at BMO Capital Markets have suggested buying the Canadian dollar on dips against the backdrop of national budget and the central bank’s monetary policy meeting next week. The outcome of those events may affect the demand for the Canadian dollar.

The Loonie stood as the top performing currency of this year as it started to exchange hands at about the 1.25 level against the greenback, which has weakened against the European currencies at the same time.

The Pound-to-Canadian Dollar, in the meantime, has recorded a 0.60% gain by closing at 1.7276. The Canadian dollar’s extra ordinary performance this year has come just before the watershed moment in the country’s history, starting tomorrow with the yearly budget which will be disclosed in the European afternoon.

The development also has come against the backdrop of a robust improvement in the country’s economic data, including GDP that withstood the stress of new Year lockdown and a rebound in the employment market that has sustained in spite of improved covid-19 restrictions that weighed on Canadian households and companies in the first-quarter of 2021.

Josh Nye, a senior economist at RBC Capital Markets, opined that an upward revision of economic outlook has undermined the need for stimulus valued at 3% to 4% of GDP, even though the government has not let down the appetite to pour money through various forms.

Nye further stated that the outlook implies the economy will function almost near full capacity next year at this time, considerably earlier than forecast in FES 2020. Bank of Canada believes the closure in output gap should be construed as the signal for pull back of monetary stimulus and the analysts expects the Canadian government to toe the same line.

The Bank of Canada (BoC) is broadly anticipated to upwardly amend its economic growth outlook in a considerable manner to mirror economic developments that were supportive than the bank’s anticipation in January when it issued the earlier set of predictions.

The Bank of Canada stated last month that it now anticipate the economy to have expanded in the prior quarter when earlier it forecast a contraction, while the bank and a portion of rate setters have pointed out that they could also formulate a plan in the coming Wednesday for systematically withdrawing the country’s foremost quantitative easing program.

Irrespective of whether the aforesaid facts are priced in, the Canadian dollar will not face any negative impact. Greg Anderson, global chief of FX strategy at BMO Capital Markets, opined that being the fourth time below 1.2500 and the second step below the major level this week there won’t be a lot of barrier defense.

The analysts believes that the EUR/CAD cross volume has been cleared from the market, paving way for the USD/CAD pair to trend in line with correlated financing pricing in the forthcoming week which will see two major events mid-week – the roll out of budget on Monday at 16:00 EDT and a BoC policy decision (plus monetary policy rate update) on Wednesday. He further stated that the events pose an increasingly downside threat for the USD/CAD pair instead of upside risk.

Anderson stated Friday that his team of analysts at BMO would be ready to sell when USD/CAD pair trades below 1.25, considering the fundamentals in place in comparison with those existed in the last two months when the Loonie was trading at about 0.80 or higher and the greenback was trading below 1.250.

The rotating financial factor of BMO that utilizes multiple variables encompassing several other asset prices to forecast near-term price movements in the USD/CAD, suggested on Thursday that the users of the model anticipate a drop in the currency pair follow a deviation between the exchange rate’s level on the market and core perceived “fair value” of the Canadian dollar.

The Loonie’s fair value has increased against the backdrop in the US bond yields, which affects mutual interest rate discrepancies that can have crucial effects on exchange rates, while the Loonie itself dropped in slightly peculiar price action.

The model assessed that Canada’s dollar is led primarily by the prices of copper and fluctuations in the S&P 500, while suggesting that the real core value for Loonie stands somewhere in the range of 1.2532-1.2462 while possessing a descending trend when stated in USD/CAD terminology.

The analyst said “Weekly charts still highlight downside momentum, despite the fundamental rationale for a move higher being a bit more compelling. Seasonals are working for the CAD so our view of a move higher might require some patience. We’re expecting buying pressure to come in ahead of any test of the 1.2450 level,” says Bipan Rai, North American head of FX strategy at CIBC Capital Markets. “While we remain near-term USD bulls, we acknowledge that price action will need to find some measure of support for that view to remain intact.”

Interestingly, analysts at CIBC forecast the USD/CAD pair to inch higher towards 1.26 this quarter before finishing 2021 at 1.30.

Analysts at CIBC Capital Markets have a polar opposite view of BMO, with respect to the outlook for the Canadian Dollar and also the US greenback and have pointed out that difference between both company’s near-term outlook, coming against the backdrop of a broad-based downtrend in the US dollar, implies that the USD/CAD can hardly remain range bound in the days ahead. In general, the Canadian dollar is known to underperform when the European currencies are gaining strength against the US dollar.

The USD/CAD pair’s trend will be cemented by the outcome of the two aforesaid events in the coming week.