Why National Bank sees USD/CAD falling to 1.20

The narratives around US and Canadian growth this year are diverging and the US dollar is rebounding because of large stimulus expectations from Congress this year.

National Bank argues the USD rebound will be fleeting, in part because Canada's programs (which are also large) have been designed around keeping people in the workforce. This chart highlights a big divergence in prime-age labor force participation in Canada and the US both over the past 20 years and since the pandemic.

Why National Bank sees USD/CAD falling to 1.20

That difference highlights much more tighteners in the Canadian economy compared to the US, according to National Bank.

Under these conditions, we find it hard to justify the Bank's current pace of quantitative easing. As recently pointed out by our colleagues1, the BoC's QE program is much more aggressive as a share of GDP than that of the Federal Reserve. Concern for financial stability would argue for QE tapering in the coming months (April or May), provided of course that the global economy continues to recover. Such a move would provide some support for appreciation of the CAD.

They target 1.20 for year-end in USD/CAD and believe it will kick off in Q2 when the BOC begins to taper.