USD/CAD is caught in no man’s land - Westpac

Richard Franulovich, Research Analyst at Westpac, notes that the oil prices have firmed as an OPEC output cut looks likely but US-CA 2yr spreads are widening sharply thanks to the BoC’s mild easing bias and the repricing of US growth/inflation expectations under Trump.

Key Quotes

“Oil prices fairly value USD/CAD near 1.32 but yields suggest 1.39/1.40 is a reasonable equilibrium. Correlation analysis suggests yield spreads have more sway at the moment, signaling ongoing upside risks to USD/CAD.”

“However, the case for yet further material widening in yield spreads seems weak. Markets discount 3 Fed hikes by mid- 2018 (+75bp), nearly double expectations in early Nov (+40bp) and a mixture of accommodative local financial conditions (low rates and a weak CAD) along with Trudeau’s fiscal stimulus could see the Canadian economy surprise on the upside in H1 2017.”

“Extending USD/CAD’s mild uptrend though end -2016 suggests 1.37/1.38 is a reasonable year-end target but CAD should flip to outperformance in 2017.”