The loonie has recovered somewhat against the USD since mid-May. However, economists at Commerzbank continue to see limited CAD appreciation potential.

Challenging environment

“In the short-term, the CAD should find it difficult to make up further ground against the USD, especially if the interest rate cycles of the US Federal Reserve and the Bank of Canada (BoC) as important drivers appear similar. Also, in phases of heightened risk aversion, the USD remains favoured as a safe haven.”

“In the medium-term, we see limited CAD appreciation potential given the robust economy and active BoC. This is because Canada, as a commodity exporter, benefits from higher commodity prices. After recovering from the pandemic, the economy is in danger of overheating. The tight labour market poses the risk of a wage-price spiral.”