USD/CAD to rise as Canadian economic and political outlook becomes cloudier – HSBC

The CAD has recovered all of the ground lost to the USD during the early phases of the COVID-19 lockdown but economists at HSBC believe the drop in USD/CAD has more to do with USD disdain than CAD enthusiasm. The Canadian dollar remains vulnerable to a still challenging economic outlook and the political outlook in Canada also seems uncertain. The economists retain a bearish bias toward the CAD.

Key quotes

“The difficulty for the CAD is where things go from the post-lockdown bounce in activity. The government support programmes are set to be tapered and then end. Canada has less room to manoeuvre on the fiscal front than some others in the G10, before that cyclical or structural trade-off becomes more of an issue for FX.”

“Political uncertainty could also rise in Canada. Parliament will return when the current proroguing ends on 23 September, and the government announces its new long-term economic plan. It will also allow committees investigating links between the WE Charity and Prime Minister Trudeau and the former finance minister, Bill Morneau, to resume their work (BBC, 20 August 2020).The Liberal Party governs with a minority of parliamentary seats.”

“All in all, our bearish view on the CAD appears not to have been shared by the market, but we remain cautious on the CAD and still look for USD/CAD to rise, albeit at a gradual pace.”