• CAD expected for a second year of outperformance in 2022
  • Seen pushing USD / CAD to its lowest since 2014 by year end
  • A force that is pushing the GBP / CAD close to the financial crisis

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The Canadian dollar is expected to hit its highest level against the US dollar since 2014 next year, according to Morgan Stanley forecasts which would see the GBP / CAD fall to its lowest level in the years immediately following the financial crisis of 2008.

The Canadian dollar remained the best performer among major currencies on Thursday and with a comfortable margin for everyone except the Chinese renminbi as well, after the loonie gained nearly 1% against the dollar. American who was otherwise a general winner for the year.

The Canadian dollar and the renminbi were the last major currencies still standing on Thursday following a U.S. dollar assault that demolished all others in its path in the five months through mid-November, and the Morgan Stanley forecasts suggest that the loonie’s outperformance may continue.

“The CAD is the top performer in the dollar block, benefiting from positive global and local stories – strong US data providing local favorable winds, hawkish BoC, robust commodity prices and risks, and less awkward positioning.” the bank’s strategists said in a presentation of their views on the outlook for 2022.

The Canadian dollar is expected to drop 1.26 on Thursday against the greenback to 1.23 before year-end, but is expected to remain afloat above the latter level throughout the first quarter of 2022 as the Bank of Canada (BoC) delivers its latest forecast on cash rates.

USD to CAD monthly

Above: USD / CAD shown at monthly intervals.

  • Reference rate at publication:
    GBP to CAD: 1.7017 USD to CAD: 1.2605
  • High bank rates (indicative): 1.16540 1.2252
  • Payment specialists prices (indicative: 1.1863 1.2540
  • Discover the specialized rates, here
  • Or, set up an exchange rate alert, here

The BoC said at the end of October that the economic conditions necessary for it to start reversing the interest rate cuts inspired by the 2020 pandemic are unlikely to materialize until the second quarter of 2022 at the earliest, which means there is a chance that investors will be disappointed with the BoC in early 2022.

“We think the USD / CAD might struggle to fall early as the BoC avoids taking off in January 2022, but a rapid pace of increases later in the year brings the pair down to 1.12 by now the end of 2022, ”the Morgan Stanley team said. .

Rates in the overnight index swap market indicated on Thursday that investors expect Canada’s benchmark spot rate to rise to 0.50% following the BoC meeting in March. 2022, and also implied a very high probability that this move would be followed by an increase to 0.75. % in April 2022.

This is a recipe for disappointment that could eventually see the Canadian dollar ravaged by the same type of selling that hit the pound in early November when the Bank of England (BoE) let a mistaken market stand alone ahead. a proverbial altar.

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“We expect the USD to continue its uptrend over the next few months, with the DXY rising to 97 by mid-2022, but then expect a pivot below 92 by the next. end of 2022, “Morgan Stanley said in reference to its outlook for the US dollar.

The market might also mistakenly think that the Federal Reserve will start raising its interest rate around mid-year before rapidly increasing borrowing costs in subsequent quarters.

Morgan Stanley doubts the Fed will be as quick to raise rates as the market expects it and the central bank itself has said U.S. policymakers believe they can afford to be patient before canceling support extraordinary impact on the economy since the start of the pandemic.

It is also the recipe for a market disappointment that could eventually weigh on the USD / CAD in favor of the Canadian dollar, although the loonie’s envisaged gains for 2022 encompass much more than the US dollar and in part because of the Morgan Stanley’s expectations for other currencies.

TWI CAD components

Above: Components and weights of the counterpart currencies of the Bank of Canada’s real effective exchange rate

All of the currencies in the G10 group are expected to remain well within their 2021 ranges against the US dollar over the next year as the USD / CAD rate tapers to 1.12 and its lowest level since before l. collapse in oil prices that ended in early 2016.

This would see the Canadian dollar strengthen considerably against all of the above currencies, including the British pound; the exchange rate of the pound sterling against the canadian dollar is expected to drop from 1.70 against the loonie on Thursday to 1.55 by the end of 2022.

This would be near the lowest level for the British pound relative to its Canadian counterpart in the years immediately following the 2008 global financial crisis.

In addition, the renminbi is also expected to remain in the 2021 range against the US dollar, meaning the loonie would also strengthen against its Chinese counterpart.

The peso is expected to lower the USD / MXN rate from an expected level of 20.70 in January 2022 to 20.00 by the end of the year, which also suggests a strength of the Canadian dollar against its counterpart. Mexican.

All of the above currencies are key components of the Canadian effective exchange rate – or the overall Canadian dollar exchange rate – as constructed by the Bank of Canada and therefore the expected performance of the loonie in 2022 would also be likely. raise the trade-weighted loonie to its highest level. highest since 2014.

CAD TWI monthly

Above: Bank of Canada real effective exchange rate for the Canadian dollar.