Falling crude oil prices weighed heavily on the loonie on Monday and USD/CAD climbed above 1.2900. Unless oil suffers another big correction, the pair could drop below 1.25 by the end of 2022.

Waiting for some carry effect

“The Bank of Canada hiked by 100 bps at the last meeting, but we expect a more moderate pace of tightening from now on. Our base-case is a 50 bps hike in September (markets currently pricing in 58 bps).” 

“The BoC frontloaded tightening should leave the loonie with some decent carry advantage, but we still expect such advantage to fully materialise beyond the short term once market sentiment has stabilised.”

“Barring another big correction in oil prices, a move below 1.25 by year-end in USD/CAD still looks on the cards.”