Canadian Dollar Billed As a Buy and Top Prospect for Year Ahead

"Vaccine development appears to be making good progress, consistent with our base case of approval by year-end, and additional headway should further lift cyclical assets as markets price in stronger growth closer to our own expectations," says Zach Pandl, Goldman 's global co-head of foreign exchange strategy. "Given our baseline forecasts and our belief that markets have yet to fully price in our constructive outlook, we reiterate our open trade recommendation."

Commodities including copper and oil are expected to be key beneficiaries of next year's global economic rebound from the coronavirus-contaminated crater of 2020, leading the Goldman Sachs team to flag the Australian and Canadian Dollars as poised for outperformance. 

Selling the greenback against an equally-weighted basket of the two currencies is one of the bank's top trades for 2021, a year that could now play out against a more fertile backdrop for international trade where countries reopen as the pandemic fades under a vaccine but without the U.S.-China tariff conflict that came before the coronavirus.  

Above: CAD/USD shown at daily intervals alongside AUD/USD (black line, left axis).

November's so-far contested U.S. election could be likely to have sealed the deal on a changeover at the White House with President Donald Trump out from January and Joe Biden of the Democratic Party in, which could potentially lead to a less confrontational stance between the world's two largest economies. 

"The policy backdrop should also remain favorable for risky assets as central banks around the world keep rates on hold and continue QE programs, combined with likely additional fiscal stimulus in the US—albeit smaller than expected under a “blue wave” scenario," Pandl says. 

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A  V-shaped recovery for the global economy and high valuation are expected to keep the U.S. Dollar on the back foot in 2021, leading USD/CAD down to 1.28 in six-months and 1.25 by year-end. The Pound-to-Canadian Dollar rate on the other hand, is seen rising to 1.7665, and then 1.80 by year-end.

It's not just the medium outlook for that could become increasingly supportive for the Canadian Dollar, according to BMO Capital Markets' USD/CAD model, which has been selling rallies in the exchange rate since early October is said to regard current levels as an overshoot of its perceived fair value. 

Above:USD/CAD shown at daily intervals alongside Pound-to-Canadian Dollar rate (black line, left axis).

"Some of the drift higher in USDCAD can be explained by softness in equity futures and oil prices, but not all. Our rotating financial factor model looks at those items and others. It has fair value in USDCAD at 1.3066, so it views the current level in USDCAD as a bit of an overshoot," says Greg Anderson, CFA and global head of FX strategy at BMO. "If we close where we are now in both spot and fair value, it will kick out a short signal."

USD/CAD was trading around 1.3138 at the North American close on Thursday and has since edged higher, indicating it's likely a candidate for short-selling by BMO's model, which tends to enter 'short' positions when the market rises above its perceived fair value level and exits them when the market falls back below 'fair value' and the latter measure stops trending down.

Canada's Dollar has for months followed stock markets that came off the boil this week when celebration of progress in developing a coronavirus vaccine gave way to concerns about its distribution and volatile trading activity. This was as some major European economies recorded new record daily numbers of infections. The Loonie has followed U.S. stocks closely for months and remains sensitive to the ebb and flow of risk appetite.

"CAD is under-performing," says Shaun Osborne, chief FX strategist at Scotiabank. "CAD remains broadly range bound as well and the prospect of a sustained move outside of 1.30/1.34 also looks very limited at present. With no domestic data to reflect on this week, the CAD will remain a slave to short-term flows, technical factors, and the broader market tone. The only event of note on the calendar (but with no major impact expected on the CAD) is today’s BoC speech by Senior DG Wilkins (possibly her last before she leaves the Bank next month) entitled “Exploring Life Post-Covid” at 13.30ET."