RBC Sees Better Canadian Dollar Performance Ahead

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Royal Bank of Canada has downgraded its forecasts for USD/CAD as it sees a more resilient performance from the Canadian Dollar in the coming months.

This will also be reflected in gains made against the Pound; however, it is expected to lose ground against the Euro in H1 2025.

RBC now predicts the U.S. Dollar to Candian Dollar exchange rate (USD/CAD) will end 2024 at 1.3750, having previously expected 1.40. The end-Q1 and end-Q2 2025 point target is 1.38. Spot is currently at 1.3576.

Downside in CAD is predicated on the Bank of Canada's swift interest rate cutting cycle, and RBC says there is a risk of a 50 basis point interest rate cut before year-end.

To be sure, RBC’s base case is for the central bank to continue to cut in 25bp increments, with one in October, a pause in December & January, and then a total of 100bps of cuts in 2025.

"But we think the September meeting has lowered the hurdle for the BoC to cut rates without pausing and even deliver -50bp at one of the coming meetings (October more likely than later)," says Daria Parkhomenko, an analyst at RBC.

Any significant USD/CAD strength will be met by strong hedging interest at 1.40, which looks to be a barrier too far, according to Parkhomenko.

Investment bank GBP/CAD consensus forecasts: The end-2024 and 2025 guide from Corpay has been released. Featuring the median, mean, high and low points forecasted by over 30 investment banks. Please request a copy here.

Elsewhere, RBC thinks the Euro could be set to outperform the Dollar in the event of a notable U.S. economic slowdown. This could take Euro-Dollar to 1.20 in 2025, according to the bank's forecasts.

The year-end 2024 forecast for EUR/CAD is set at 1.4850, the end-Q1 2025 target is 1.5042, and the end-Q2 target is 1.5180. The exchange rate is currently at 1.5060.

Although the Pound is seen as having the advantage of high interest rates at the Bank of England in its corner, RBC thinks positioning in the currency is too stretched, leaving it vulnerable to a pullback.

Another potential downside drag for the Pound would be a setback in global equity markets, to which the Pound has proven itself very sensitive.

The Pound to Canadian Dollar exchange rate forecast profile is 1.73, 1.7250 and 1.7250 for these respective timeframes, which implies a steady path of decline from the current level of spot at 1.7842.