CAD: We see room for appreciation - Lloyds Bank

Analysts from Lloyds Bank forecast that the USD/CAD pair will move toward 1.25 by year-end.

Key Quotes:

“USD/CAD has rallied by around 4% since the UK’s decision to leave the EU. In our opinion, this had less to do with risk sentiment, and more to do with shifting US interest rate expectations, lower crude oil prices and relatively weak Canadian economic fundamentals.”

“Consensus expectations are that crude oil prices will move higher by year end. In turn, we expect a partial retracement in recent USD gains. In addition, global risk sentiment has stabilised through July and August. Still, consecutive US non-farm payrolls releases above 250k, highlights the “strength” of the US labour marketreferenced in the most recent FOMC statement.”

“Concurrently, Canadian employment has underperformed expectations over the last two months, and significantly so in July. Furthermore, recent monthly Canadian GDP also disappointed. This may lead the BoC to consider cutting interest rates, although inflation, retail sales and manufacturing have proved more resilient thus far. As such, we see some room for CAD appreciation, and forecast USD/CAD to decline towards 1.25 by end-2016 and 1.22 by end-2017.”