Foreign exchange strategists at Scotiabank forecast the US Dollar to fall against the Canadian Dollar by approximately 1.7% from today's exchange rate, towards 1.30, by the end of 2023.
As of today, the US-Canadian Dollar exchange rate (USDCAD) is trading at 1.32233.
Since June 2023, the Canadian Dollar (CAD) has seen a modest strengthening, but it has underperformed against other major currencies.
Strategists at the Bank of Nova Scotia (Scotiabank), a Canadian multinational banking and financial services company, suggest the short-term outlook for the CAD indicates the currency's performance is shackled to the broader USD trend, but there are signals of selling interest around the 1.32 zone.
"The Canadian dollar (CAD) has strengthened modestly since the start of June, rising some 2% against the generally weaker USD," says Shaun Osborne, Chief FX Strategist at Scotiabank.
However, the CAD's progress in the global financial market has not been as significant as one might expect given these circumstances.
"The CAD has, however, underperformed most of its major currency peers over that time frame," he adds.
Despite the CAD's underperformance, Osborne recognises the resilience of the domestic economy, which has outperformed relative to expectations, and the labour market continues to show strength.
The Bank of Canada (BoC), in response to these robust economic developments, has increased interest rates in June and may continue the tightening cycle in the next few months.
Osborne also highlights the impact of the BoC's monetary policy decisions on the CAD's performance.
"The Bank of Canada (BoC) paused tightening monetary policy in January but moved to lift interest rates again in June in response to economic developments," says Osborne.
This proactive approach by the BoC seems to have underpinned the CAD to some extent.
"The CAD has benefited from narrowing short-term interest rate differentials versus the USD but is finding additional progress hard to establish, and its broader underperformance means it has lost ground on the crosses," he explains.
Looking to the future outlook, the Scotiabank strategist anticipates some modest improvement in the Canadian Dollar (CAD) against the US Dollar (USD).
For the US Canadian (USD/CAD) exchange rate, Osborne forecasts a possible easing to 1.30 by year-end and suggests that an overshoot to the 1.28 area should not be ruled out as a risk in the third quarter.
"We anticipate some modest improvement in the CAD versus the USD over the second half of the year and continue to target USDCAD easing to 1.30 by year-end," Osborne remarks.
Near-Term USD/CAD Exchange Rate Outlook
On the short-term outlook, Osborne points out that the Canadian Dollar (CAD)'s performance is highly tied to the broader US Dollar (USD) trend, and the currency pair seems to be establishing a range.
He asserts, "The CAD tone remains shackled to the broader trend in the USD, it would seem, but spot is still attracting better selling interest around the 1.32 zone for now."
The strategist further discusses the short-term technicals of USDCAD exchange rate, mentioning the importance of firm data in potentially lifting the Canadian Dollar modestly.
"USDCAD short-term technicals are neutral/bearish, " says Osborne.
"Spot has been chopping around in a range centred on the mid/upper 1.31s for most of this week, robbing the market of any short-term momentum," the analyst adds.
This range-based trading presents both challenges and opportunities for investors in the near term.
In the short-term Canadian Dollar outlook, Osborne stresses the importance of the 1.3070 level as a critical juncture for USDCAD.
"Downside momentum may need a “refresh” from a break under 1.3070 (200-week MA)," he suggests, indicating the importance of this level as a potential trigger for renewed selling pressure.
In essence, both the longer-term and short-term outlooks presented by Osborne highlight the CAD's potential to strengthen against the USD but also underscore the challenges it faces due to broader market dynamics and domestic economic factors.