BofA: USD/CAD Outlook Ahead of September BoC Meeting

BofA anticipates the Bank of Canada (BoC) will cut the overnight rate by 25 basis points in its September 4 meeting, bringing it to 4.25%. Despite CAD’s recent rally, the currency is not expected to move significantly post-meeting, as it is nearing its short-term fair value against the USD. BofA forecasts USD/CAD to retrace to around 1.36 in Q3 2024 and potentially end the year near 1.35.

Key Points:

1. BoC Rate Cut Expectation:

   • BofA expects a 25bp cut in the BoC’s overnight rate target to 4.25%.
   • The cut is anticipated due to weak growth, rising unemployment, and declining inflation.

2. Current CAD Valuation:

   • CAD has rallied by 3% to a mid-1.34 range but is no longer considered undervalued.
   • At the recent spot level of around 1.35, CAD appears slightly rich based on short-term fair value metrics and the 2-year US-CA rate differential.

3. Near-Term USD/CAD Outlook:

   • The pair is expected to retrace to the 200-day SMA in the short term.
   • With the next BoC rate cut already priced in, significant movement in USD/CAD post-meeting is unlikely.

Conclusion:

BofA predicts a 25bp rate cut by the BoC will have a limited impact on USD/CAD, with the pair likely to hover around current levels. The forecast suggests a short-term retracement to 1.36, with potential appreciation of CAD bringing the year-end level to around 1.35 against the USD.

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