After a strong start to the quarter, the Canadian dollar is down 1% against the US dollar in the fourth quarter. Economists at the National Bank of Canada view the loonie as fundamentally undervalued and see scope for a rally over the coming months. They maintain their forecast calling for a USD/CAD rate of 1.20 in 2022. 

CAD should do better in the lead up to BoC tightening

“The loonie looks to be undervalud by 10 cents. So, assuming that two-year interest rates differentials remain near current levels, we calculate that the current value of USD/CAD reflects WTI prices of only $42. That seems extreme unless of course global growth prospects deteriote markedly in the coming weeks due to the pandemic.”

“We see little reason to change our central bank’s mandate and recommend implementing the first of multiple rates hikes no latter than next March. On average, the loonie has been better bid in the lead-up to and in the early stages of BoC hiking cycles.”

“We remain comfortable with our current forecast calling for a USD/CAD rate of 1.20 in 2022.”