They see the Canadian dollar at 1.20 in Q3 2022 with risks of an overshoot
FX forecasts aren't worth much but they tell you which way the wind is blowing. After predicting the BOC will hike 8 times through 2023 yesterday, ScotiaFX today boosted its Canadian dollar forecasts.
They now see the US dollar falling to 1.22 versus CAD at year end before falling further to 1.20 in Q3.
At the core of the forecast is policy divergence with a 75 bps policy rate spread opening up at the end of next year and persisting through 2023 when the BOC rate will be at 2.25% compared to Fed funds at 1.50%.
"The persistence of a significant policy premium will be supportive for the CAD and we are revising our CAD forecast accordingly," Scotia writes. "We continue to view the 1.20 zone as a strong technical support zone for the USD in the medium term but this level is also an important pivot point for USDCAD. Overshoot risks are non-negligible; a combination of the expected BoC policy tightening and strong or stronger commodity prices could potentially drive USDCAD well below 1.20, for example."
For reference, they cite back in 2010 when the spread reached 75 bps and USD/CAD fell all the way to 0.94.
There's a bit more torque in CAD crosses with CAD/JPY seen rising to 96/97 and EUR/CAD down to 1.34.
