Volatility has increased across markets, weakening the loonie as risk sentiment overtakes economic fundamentals as the driving force. Back in April, a terms-of-trade shock and expectations of tighter BoC policy led the Canadian dollar to strengthen to 1.24 against the US dollar until Fed officials announced more aggressive quantitative tightening relative to last cycle, sending CAD above 1.28 by the end of April. In response to that, we raised our one-month forecast to 1.26, highlighting that USDCAD embedded a risk premium of around 2 cents. Since, volatility in global markets has picked up, suggesting this risk premium remains, however, external macroeconomic conditions have also deteriorated. The latter development has resulted in us upgrading our near-term USDCAD forecasts.
Read our latest USDCAD Update here:
Simon Harvey, Head of FX Analysis
Jay Zhao-Murray, FX Market Analyst
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