Morgan Stanley reaffirms a super bullish view on the Canadian dollar, expecting USD/CAD to decline into the low 1.30s over the next few quarters. Diverging monetary policy paths, positive yield differentials, and supportive reforms are seen driving CAD strength, despite headwinds from oil and immigration dynamics.
Key Points:
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Fed vs. BoC Policy Divergence:• The Fed is seen more inclined to cut rates than the Bank of Canada, with dovish signals from Bowman, Waller, and Powell boosting market pricing for Fed easing.• This relative policy stance should widen yield differentials in Canada’s favor.
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US-Canada Economic Agreement Tailwind:• Prospects for a new US-Canada economic and security agreement could reduce tariff-related growth risks and improve the BoC’s growth outlook.
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Long-Term Structural Support:• Despite global concerns about a shift away from oil and immigration challenges, reforms like the One Canadian Economy Act are expected to lift productivity, underpinning CAD resilience in the medium term.
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Energy and Immigration Caveats:• Morgan Stanley acknowledges that energy market dynamics and immigration flows may weigh on Canadian growth next year, but see these as manageable.
Conclusion:
Morgan Stanley expects USD/CAD to move toward the low 1.30s, supported by policy divergence, yield differentials, and structural reforms. While CAD may underperform some other G10 currencies due to oil and immigration factors, the team remains super bullish on the currency’s relative strength vs. the USD over the coming quarters.
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This article was written by Adam Button at www.forexlive.com.