Shaun Osborne, Chief FX Strategist at TD Securities, on USD/CAD and EUR/CAD

We believe that the Canadian Dollar looks a little bit stretched at these levels. Overall, we have been bullish on the U.S. Dollar, and we expect that the Canadian Dollar is likely to lag behind general Dollar strength throughout this year. Thus, we see the USD/CAD currency pair to trade up towards the 1.06 level, in line with our end Q3 forecasts. We see the pair to trade up to the 1.11 area in the first half of next year. It seems that overall trend is too high in USD/CAD; however, it might slip a little bit lower towards low end of the range. Generally speaking, we are still quite constructive on the U.S. Dollar versus Canadian Dollar.

The main issue we are concerned about is disappointingly low level of growth in Canada; moreover, we do not see a substantial pick-up in the U.S. economic recovery at the moment. I think growth in Canada is still highly dependent on domestic consumption, as there is no transition from domestically-led growth to growth that is more supported by foreign trade. Trade sector is struggling somewhat as we are running a fairly large current account deficit at a time, when it appears that financing the deficit is starting to become more difficult, as investors have been pulling money out of Canada, especially in June. The most recent data for international securities transactions is adjusted; there is a very heavy redemption of investments in Canadian bonds in the middle of the year. Thus, the overall picture of inflows into Canada to finance the current account deficit continues to weaken. We saw the peak of inflows in 2011, early upon 2012, and since then inflows have been somewhat weaker. 

Thus, fairly low levels of growth, reliance on domestic drivers at a time, when the Canadian economy is still looking quite leveraged, and rather significantly resistant current account deficit suggest to us that the Canadian Dollar probably should fall modestly from the current levels.

We expect EUR/CAD to trade around 1.35 through the end of the year. It is quite likely that the EUR/CAD exchange rate is probably topped out at the moment. The pair has rallied up to toward the 1.41 area over the past few weeks. However, Canada seems to be in a transition area and debt market is probably getting towards a little bit more softness in the short term. Thus, I think 1.36 – 1.37 is certainly reachable in the next few weeks; while 1.35 is in a year is a target for EUR/CAD.