CIBC FX Strategy Research notes that the GDP growth in the US and Canada is always highly correlated so when they diverge, FX moves often help to bring growth rates closer together again.
“Based on policymakers’ own sensitivities to the moves in FX recently, alongside the turn to hiking by the BoC, are already large enough to see growth rates converge again. Our forecasts for 2018 differ from those achieved here because we see the Canadian economy being more sensitive to rate hikes than in the past, but also don’t expect the US economy to get a significant boost from a weaker currency,” CIBC adds.
“Either way though, this analysis suggests another reason for the BoC to be cautious in letting the C$ appreciate further from here.
Indeed, we actually see the C$ giving back some of its recent strength, with USD/CAD rising back to 1.30 by year-end,” CIBC argues.