Last week, Royal Bank of Canada lowered its forecast for USD/CAD as the bank believes that the performance of the Canadian dollar will be more resilient in the coming months.

The Royal Bank of Canada currently predicts that the USD/CAD ratio will be 1.3750 by the end of 2024, lower than the previous expectation of 1.40. The target level for the end of the first and second quarters of 2025 is 1.38.

The decline of the Canadian dollar depends on the rapid interest rate cut cycle of the Bank of Canada. The Royal Bank of Canada has stated that there is a risk of a 50 basis point interest rate cut by the Bank of Canada before the end of the year.

The basic forecast of Royal Bank of Canada is that the Bank of Canada will continue to cut interest rates by 25 basis points, once in October, pause rate cuts in December and January next year, and then cut a total of 100 basis points in 2025.

However, we believe that the September meeting lowered the threshold for the Bank of Canada to continue cutting interest rates, and even cut rates by 50 basis points at a future meeting (more likely in October), "said Daria Parkhomenko, an analyst at Royal Bank of Canada

Parkhomenko stated that any significant strength in USD/CAD will encounter strong hedging interest at 1.40.

In addition, Royal Bank of Canada believes that if the US economy slows down significantly, the euro may outperform the US dollar. According to the bank's forecast, the euro to dollar exchange rate may reach 1.20 by 2025.

The EUR/CAD forecast for the end of 2024 is 1.4850. The target for the end of the first quarter of 2025 is 1.5042, and the target for the end of the second quarter is 1.5180. The current exchange rate is 1.5055.

Although the pound is seen as having the advantage of high interest rates from the Bank of England, the Royal Bank of Canada believes that the pound's holdings are too tight and vulnerable to a pullback.

Another potential downside resistance for the pound is the setback in the global stock market, which has proven to be very sensitive to it.

The Royal Bank of Canada predicts that the GBP/CAD ratio will be 1.73 by the end of 2024, 1.7250 by the end of the first quarter of 2025, and 1.7250 by the end of the second quarter, indicating a steady decline from the current level of around 1.7840.

Daily chart of USD/CAD exchange rate