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UBS Lifts USD/CAD Target to 1.425 on Rate Differential Outlook
UBS has recommended a long position on the USD/CAD currency pair, setting a new target of 1.425 based on the outlook for interest rate differentials between the U.S. and Canada, according to a note from the bank.
New Target and Rationale
Analysts at the Swiss bank initiated the recommendation with a stop-loss set at 1.38. While maintaining a neutral overall view on the Canadian dollar, UBS noted that near-term risks are skewed towards a higher USD/CAD exchange rate.
The primary driver for this forecast is the divergence in monetary policy expectations. UBS anticipates that both the U.S. Federal Reserve and the Bank of Canada are likely to keep interest rates on hold. However, the bank believes current market pricing leaves room for a "modest repricing" that would benefit the U.S. dollar.
AdMarket and Economic Factors
According to the note, the lower-yielding Canadian dollar is at a disadvantage in a carry trading environment, where investors borrow in a low-interest-rate currency to invest in a higher-yielding one. This dynamic supports a gradual appreciation of the USD/CAD pair.
UBS also noted that some potential headwinds for the Canadian dollar appear limited. Risks related to trade seem to be largely priced in by the market. Furthermore, improving economic data in Canada is expected to prevent a sharp sell-off of the currency, suggesting a more gradual upward move for the pair toward the bank's target.
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