Analysts at Rabobank point out the Bank of Canada (BoC) has the highest policy rate in the developed world and they consider that if the Federal Reserve cuts aggressively then the central bank’s hands will be forced, likely putting some downward pressure on the Canadian dollar.
“On an interest rate basis, USD/CAD should have been trading in the mid-1.20s throughout most of the year but USD did not trade off the back of rate differentials. We do see room for this correlation breakdown in 2020 but it is fair to say that if the Fed does take rates down to the zero-bound then this will put some pressure on USD despite other drivers implying support for the Greenback.”
“We have recently revised down our USD/CAD forecast to reflect some USD weakness in 2020H2 and relatively buoyant oil prices. We now expect USD/CAD to primarily trade between 1.30 and 1.32 in the coming months before the market starts to price in some BoC easing which will push USD/CAD up to 1.33 until the extent of the Fed’s likely easing cycle becomes clear and pushes the pair back to 1.32 again.”