Scotia outline the reasons they are bullish with their outlook for the CAD. '
We expect the BoC to raise rates 100 bps from the second half of next year and a further 100 bps in 2023 ... That would sustain a policy rate premium of 75 bps over the Fed’s key target rate through our forecast horizon. However, markets are pricing an earlier start to lift off and nearly 125 bps of tightening next year, which implies a policy rate spread of 100 bps—very wide by recent, historical standards.
- That might be too much but the BoC is still likely to initiate its tightening cycle well ahead of its peers and this will drive the CAD higher against the USD, as well as the EUR and JPY, for example.
We expect commodity prices to remain relatively well-supported as the global economy re-opens and supply disruptions maintain a premium on certain raw materials. ... firm prices for commodities generally and improving Canadian terms of trade do provide a further tailwind for the CAD.
- We see limited downside risks for the CAD in the near-term (but concede that volatility around year-end may favour the USD) and we continue to forecast USDCAD reaching 1.20 next year, primarily as a reflection of the BoC’s monetary policy stance.
CAD/JPY has had a strong 2021:
