By Samuel Indyk

Investing.com – Dutch bank ING expect the Canadian Dollar to continue to strengthen and now see USD/CAD falling to 1.16 by year end.

The bank had previously expected to drop to 1.19 by the end of 2021 but the earlier than expected hawkish shift by the Bank of Canada has forced them to upgrade their profile and they now expect a fall below 1.20 in Q3, with downside room extending to 1.16 by the end of the year.

Last month, the became the first major central bank to being slowing the emergency stimulus measures announced at the start of the pandemic. The central bank said they would scale back weekly purchases of bonds by CAD 1bln, and the hawkish shift has supported the CAD in recent weeks.

Since the decision, the CAD has risen 3.2% against its US counterpart.

Virus concerns fading?

ING also note the improving coronavirus situation in Canada which should support the outlook for the economy. There is no doubt that the speed of vaccinations has been slower than the US while cases were also rising rapidly at the start of the year, however, ING notes there have been multiple indications that additional restrictions and improving vaccination speed have had the desired effect of flattening the curve.

“A reduction in cases has been accompanied by a sharp increase on the vaccination side,” ING said. “At the moment, Canada is administering more daily vaccine doses per 100 people than the US, the UK and the EU.”

Oil prices

The third important factor, according to ING, is the price of oil.

“Despite rising OPEC+ output, and accounting for larger Iranian supply, the market is still set to draw down inventories throughout the year, according to our commodities team,” ING said. “which is expecting to be supported around the 70$/bbl in the second half of 2021.”

The bottom line

With the US economic recovery appearing to be in full swing but the Fed looking to remain dormant in the near term, ING says this is an ideal combination for CAD, allowing the currency to benefit from improving US demand while enjoying the monetary policy divergence from the BoC.

Citing the reasons given above, and in line with their bearish view on the USD, ING expect USD/CAD to start trading sustainably below 1.20 in Q3 before a fall to 1.16 in Q4.

At 11:00BST, USD/CAD trades relatively flat at 1.2134.

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