USD/CAD: CAUTIOUS OVER THE EXTENT OF THE LOONIE’S RECOVERY – MUFG

During June, the USD/CAD pair rose from 1.2657 to 1.2878. Economists at MUFG Bank expect the Canadian dollar to regain some ground but at a slow pace.

MUTED RECOVERY FOR THE CANADIAN DOLLAR

“The BoC meeting in July will be important and if the BoC follows the Fed’s lead, it will limit near-term downside risks. However, the global backdrop for risk is set to remain unfavourable and that points to broader US dollar strength. However, aggressive BoC action and a rebound in crude oil prices like we expect should limit the scope for USD/CAD to move higher in Q3.”

“The risk of a downturn in 2023 is increasing and given Canada’s closer links to the US where the Fed’s actions make a recession there more likely, it could result in a more muted recovery for the Canadian dollar.”

“We expect crude oil prices to decline in Q4 which could further undermine the extent of CAD recovery.”

“So while we expect CAD recovery from current levels, we have become a little more cautious over the extent of the recovery.”