Citi raises USD/CAD target to 1.43 on Fed-BoC divergence

Citi raised its USD/CAD three-month forecast to 1.43, citing asymmetric scope for policy divergence between the Federal Reserve and Bank of Canada.

"There is asymmetric scope for policy divergence as the Fed signals willingness to tighten while the BoC remains constrained by subdued core inflation and USMCA uncertainty," Citi strategists said.

The revision lifts the six-to-12-month target to 1.42. USD/CAD traded at 1.4195, near multi-year highs, after rallying almost 3 percent during June.

The Canadian dollar faces headwinds from fading energy tailwinds and slowing foreign investment, Citi said. Higher hedging costs and weaker capital inflows should continue to support the pair over the medium term.

Scotiabank offered a more cautious near-term view. While yield spreads have narrowed from recent extremes, they remain historically wide and continue to favor the US dollar, the bank said. From a technical perspective, USD/CAD's "very overbought trend higher is poised to moderate somewhat," suggesting the recent rally may pause even if a broader reversal has yet to develop.

The revised targets signal Citi expects sustained US dollar strength against its Canadian counterpart. Investors will watch upcoming BoC and Fed policy meetings for further divergence signals.

This article is for informational purposes only and does not constitute investment advice.