Goldman Sachs: How Low Can You Go?

Goldman Sachs note that "during a Q&A Thursday, BoC Governor Macklem issued a clear (if mild) warning against a stronger CAD. Since we cut our 3-month forecast to C$1.23, USD/CAD has travelled even lower, approaching our 12-month forecast of C$1.20. While Governor Macklem attributed part of the recent strength in CAD to higher commodity prices, which he noted would benefit the Canadian economy, he warned against any further moves that did not reflect positive developments or "good news" for Canada, as they could have a material impact on the BoC's outlook and, as a result, would have to be taken into account in their setting of monetary policy. Overall, the message seemed consistent with tolerance of future CAD strength that reflects an improving macroeconomic profile, while strength related to non-Canada developments, like shifting U.S. policy expectations, that were not balanced by a better domestic outcome, could result in a change to the BoC's output projections. While oil prices have strengthened, our commodity strategists' forecasts imply that Brent prices still have room to rise, which could continue to put pressure on USD/CAD. Our models suggest that a 1% change in the price of oil has historically translated into about 8bp on USD/CAD. Given the potential for further strength on oil prices, and the improving covid situation, we have decided to lower our 3- and 6-month USD/CAD forecasts to C$1.21 and C$1.20. Looking ahead, data for both April CPI and March retail sales will be released this week. As public health measures were tightened in several provinces in mid-April, CPI could reflect some lockdown-related weakness, though potentially also some of the goods price pressures observed in the U.S. April CPI release; March, on the other hand, should reflect the period prior to Canada's third wave of COVID cases."