BofA Eye Short-Term CAD Rebound And Still Bullish Long-Term

BofA note that they expected USD/CAD to move higher after the July BoC meeting but the magnitude of the rally (the August rally from Jul 31 would rank at the 94th percentile since 1999) is still a bit of a surprise.

• Short-term: 1.33 by end of Q3. The August rally has overshot vs cross-asset factors.
• Medium-term: Downtrend to stall with heightened volatility around 1.32 around 4Q23 to 1Q24, with the volatility coming as the market comes to their view of a first BoC cut in 2Q24. More material CAD appreciation would likely occur later in 2024 to 1.26 by year-end 2024. Risk from a sharper growth downturn in Canada to the point of decoupling from a resilient US economy.
• Long-term: PPP and REER drivers still supportive for CAD, along with relatively more prudent fiscal measure in Canada vs US. PPP-based metric sees spot falling to 1.19, whilst US REER still historically rich level vs CAD REER only at 29^th percentile compared to history since 1999.