There is scope for near-term softness on the policy divergence that's underway between the Fed and BoC, but a broad weakening trend in the USD by mid-year will give CAD a lift, economists at CIBC Capital Markets report.

Loonie could stay under a bit of pressure in the near term

“The Loonie could stay under a bit of pressure in the near term with risks of a move towards 1.37, as markets focus on the divergence in policy that is underway between the Fed, which is still expected to take rates a quarter point higher at least two more times, and the BoC that is currently on hold.”

“By June, we still expect to see enough evidence of a cooling in US growth and inflation to have markets looking past the end of a US tightening cycle, a development that should put the US Dollar on the defensive.”  

“We see USD/CAD ending the year at 1.31.”

“With global growth likely to receive a lift as central banks outside of North America also start to cut policy rates towards neutral, and higher commodity prices benefitting Canada’s export sector, look for USD/CAD to reach 1.28 in 2024.”