CAD: 1.36/1.37 is a reasonable year-end target - Westpac

Richard Franulovich, Research Analyst at Westpac, notes that the CAD continues to be caught between a meaningfully positive impetus from higher oil prices and steady erosion in yield support, the latter reflecting the ongoing decline in USTs as US growth/inflation expectations are repriced under Trump.

Key Quotes

“Further meaningful loss of CAD yield support seems unlikely, even allowing for scope for more Fed hikes to be priced in (+34bp in 2017). Higher oil prices signal a genuine floor for Canada’s terms of trade while 3.5% Q3 GDP was higher than the BoC forecast (3.2%). Admittedly Trudeau’s family benefit payments are not yet boosting household spending and most of the Q3 growth recovery was energy-led but there are enough green shoots to keep the BoC sidelined.”

“Accommodative local financial conditions (low rates and a weak CAD) along with Trudeau (and Trump’s) fiscal stimulus should see the Canadian economy surprise on the upside in H1 2017. Extending USD/CAD’s mild uptrend through end-2016 suggests 1.36/1.37 is a reasonable year-end target but CAD should flip to outperformance in 2017.”