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03:10 PM EDT, 05/07/2021 (MT Newswires) -- Last week, CIBC's currency strategists let clients know that the bank was giving up on its forecast for Canadian dollar weakness for now. "But we're still ready to play that hand again when the time is right," said CIBC's Avery Shenfeld, noting that currency projections are always a bit of a gamble. In fixed income, Shenfeld said, economists can lean on a useful rule of thumb: better than expected economic news sees yields rise, downside surprises go the other way. Not so, he noted, in the world of FX, as demonstrated by the Canadian dollar's ability to rally just as its economy got hit with a tough new wave of Covid-19. Shenfeld added; "Simple rules don't apply, because there are just too many forces at play, including the general trend of the US dollar against other majors, interest differentials, trade balances, commodity prices, large M&A transactions, and the market's risk appetite." Shenfeld said the thesis behind CIBC's earlier forecast still stands. According to him, the US will easily beat Canada in the race to get back to its pre-Covid GDP path, and will hike rates a bit earlier than Canada as a result. Oil prices will stay rangebound as OPEC+ supply increases, while some other commodities will cool in 2022 as supply catches up to the cyclical climb in demand. And historically, he noted, Canada has struggled to gain much growth traction from exports whenever dollar-Canada is below 1.30, making the Bank of Canada less likely to hike aggressively when the currency is materially stronger than that. But, Shenfeld said, central bank 'verbiage', and the wait for US payrolls to catch up to GDP gains, are standing in the way of investors buying into that logic just yet. In his eyes, the market is giving too much weight to Fed prognostications, ignoring the fact that the FOMC frequently ends up diverging wildly from its medium term rate forecasts. In this case, he added, the market is too accepting of a Federal Reserve assumption that core inflation won't run hotter than it can tolerate in 2022, even in the wake of massive fiscal stimulus and zero interest rates. Shenfeld noted this has the Fed forecasting an economic boom, but a need to retain zero interest rates until 2024. That's a sharp contrast with what CIBC judges to be a more realistic appraisal being offered by the Bank of Canada, which sees the US outpacing Canada this year (like last year), but only committed to keeping Canada rates near zero through first half of 2022. "Until the Fed is willing to concede the obvious, which is that this year's temporary bump in inflation could be followed by a less-temporary upward tilt in 2022, FX markets are going to be looking for alternatives to the greenback, including the loonie," Shenfeld said. "We don't see that Fed confession coming until we have seen a string of job gains that are many times larger than what was reported today. So last week we had to fold 'em, and put our call for Canadian dollar weakness aside until the fall. But we still expect to see a 1.30 exchange rate at some point in 2022." |