- The U.S. dollar took a breather in January, as the new administration in Washington doubled down on its protectionist rhetoric. But still-favourable yields suggest the USD could bounce back sooner rather than later, particularly if, as we expect, Trump delivers on his promise to provide fiscal stimulus. The Fed, which already expects three rate hikes this year (one more than markets expect), will then have to upgrade its growth forecasts because the last Summary of Economic Projections did not include fiscal measures.
- While we’ve adjusted our near term forecast to reflect a stronger-than-expected loonie, we continue to expect oil prices to soften and hence for USDCAD to head towards 1.40 later this year. A depreciation past that cannot be ruled out, particularly if U.S.-Canada trade relations take a turn for the worse. Over the near term, however, the loonie could temporarily capitalize on the USD’s weakness.
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