Rabobank Forecasts USD/CAD to Trade in 1.34–1.36 Range as US-Canada Rate Gap Narrows
Original source: InvestingLive.com
Author: InvestingLive Editorial
The USD/CAD currency pair has come under scrutiny as global financial markets focus increasingly on the outlook for interest rates in the United States and Canada. According to a recent Rabobank report, analysts expect the USD/CAD exchange rate to remain steady within the 1.34 to 1.36 range in the near to medium term. This prediction reflects expectations that the interest rate differential between the Federal Reserve and the Bank of Canada (BoC) will gradually narrow, exerting influence on the valuation of both currencies.
This article provides a comprehensive dive into Rabobank’s forecast, the macroeconomic context behind the USD/CAD projection, and the monetary policies in play in both the United States and Canada. Additionally, insights from other financial institutions are included for a well-rounded view of the pair’s outlook.
Summary of Rabobank’s Forecast
Rabobank’s projections are rooted in current macroeconomic indicators and anticipated policy actions. Key elements include:
– A forecasted USD/CAD trading range of 1.34 to 1.36 in the coming months.
– Expectations of a narrowing Federal Reserve-Bank of Canada interest rate gap.
– Cautious optimism on the loonie’s ability to strengthen should Canadian inflation remain sticky.
– U.S. dollar strength to wane gradually as the Federal Reserve approaches the end of its rate-hiking cycle.
Rabobank economists believe that recent divergence in monetary targets between the Federal Reserve and Bank of Canada may not continue to widen. Instead, both central banks are poised to signal a shift toward more accommodative stances in tandem, which would reduce the yield advantage supporting the U.S. dollar.
The Rate Gap Explained
Central to Rabobank’s view is the idea that the differential in interest rates between the U.S. and Canada represents one of the most significant drivers of the USD/CAD pair. Historically, when U.S. interest rates are significantly higher than Canada’s, investors are drawn to U.S. assets, bidding up the U.S. dollar. Conversely, when the interest rate gap narrows, the loonie tends to find support.
As of early August 2024:
– The Federal Reserve’s benchmark interest rate stands at 5.25 to 5.50 percent.
– The Bank of Canada’s overnight rate is 5.00 percent.
This leaves a relatively narrow gap of 25 to 50 basis points. Rabobank expects that any forthcoming interest rate changes will likely be matched or nearly synchronized between both central banks, thus preserving this narrow spread. The bank also emphasizes that the loonie is sensitive to not only rate expectations but also broader commodity price movements, especially oil.
U.S. Economic Outlook
The United States economy has maintained a relatively resilient profile, with unemployment figures remaining low and core inflation cooling gradually. Nonetheless, there’s growing consensus among economists that the Fed is nearing the peak of its tightening cycle.
Key U.S. indicators include:
– Headline inflation declining to 3.2 percent in July 2024, down from nearly 9 percent in mid-2022.
– Core Personal Consumption Expenditures (PCE) slowing to below 4 percent.
– The U.S. labor market showing signs of moderation, with the July 2024 jobs report reflecting hiring below expectations.
Fed Chair Jerome Powell has indicated that while inflation is softening, it remains somewhat above the Fed’s long-term target of 2 percent. Consequently, the Federal Reserve has maintained a cautious stance, waiting for additional data before committing to rate cuts.
According to the latest Fed dot plot and CME FedWatch Tool:
– Markets are pricing in a 65 percent probability of the Fed holding rates steady in the next quarter.
– Rate cuts are now expected in the first half of 2025, contingent on continued disinflation and
Read more on USD/CAD trading.