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- USD/CAD to remain in holding pattern say TD, CIBC.

- AUD/CAD could rise more than 5% during months ahead.

- Interest rates drive USD/CAD, oversold AUD prompts AUD/CAD.

The Canadian Dollar is set to remain in a holding pattern against the greenback over coming months but is likely to cede ground to an oversold Australian Dollar going forward, according to analysts at TD Securities and CIBC Capital Markets.

Bank of Canada (BoC) monetary policy means Canada's Dollar is likely to resist any further advance of the U.S. greenback during the months ahead, despite that the Federal Reserve (Fed) has raised its interest rate more than any other developed world central bank.

But the widening gap between rates on either side of the U.S.-Canada border is likely to prevent the Loonie from opening up any meaningful lead over its North American rival. The net effect of this is likely to see the USD/CAD rate confined to the 1.28 - 1.32 range that has prevailed since May 2018.

That is the view either stated or implied by forecasts from both Toronto-headquartered companies, TD Securities and CIBC Capital Markets.

"We have revised down our USD/CAD forecasts vs. last month not because the resolution of trade tensions clears the way for another BoC hike this month, but rather we expect the next move earlier than previously assumed, in Jan vs. April," says Jeremy Stretch, a strategist at CIBC, in a note to clients. "However, once a Jan hike is out of the way, we expect a prolonged period of BoC inertia prompting a move back into the low 1.30’s into H2’19."

The market implied interest rate for the BoC's October 24 meeting is around 1.72%, up from just 1.64% at the beginning of September, while the rate implied for January 09 has moved from 1.84% to 1.94% during the same time.

The current cash rate is just 1.5%, so the above pricing suggests investors will have taken much of the BoC's next two rate hikes to the bank, leaving only limited room for traders to reward an actual rate rise on the day.

Changes in interest rates are only made in response to movements in inflation but impact currencies because of the push and pull influence they have on international capital flows and their allure for short-term speculators.

This is why Stretch and the CIBC team say the USD/CAD rate will fall over coming months, but only reach as low as 1.28, and that will be once into January.

And that low point, which would be a peak for the Canadian Dollar, will soon give way to market pressures that ultimately push the rate back to 1.29 in March 2019.

The USD/CAD rate was quoted 0.39% higher at 1.2986 Wednesday. Stretch's view is similar to that put forward by TD Securities this week.

"The capital flow position has improved but still doesn't offer a strong buy signal for the loonie, especially as McConnell poured cold water on the notion of a swift USMCA deal. USDCAD [fair value] still sits above 1.30, leaving us buyers on dips and holding our tactical AUDCAD long exposure," says Mark McCormick, North American head of FX strategy at TD Securities.

McCormick says "fair value" for the USD/CAD rate is just above the 1.30 level so, after having dipped as low as 1.28 at the beginning of October, the exchange rate is now likely to re-converge with its equilibrium level. Exchange rates do normally fluctuate within ranges that almost always straddle their "fundamental value".

He also argues the Loonie will cede ground to the Australian Dollar over coming weeks. The sheer scale of losses suffered by the beleaguered Australian Dollar this year means the Antipodean has scope to recover some ground from its rivals regardless of what central banks do in the short term.

The Australian Dollar has fallen by 5.5% against the Canadian Dollar this year and by close to 8% against the U.S. Dollar due to a range of factors including the destructive effect President Donald Trump's "trade war" with China has had on sentiment toward the Aussie and its commodity-dependent economy.

Both CIBC and TD Securities are now betting the Antipodean catches a breather during the weeks ahead.

"AUD/CAD has retreated by more than 5.5%, breaching ’15 lows post the USMCA deal. While the CAD should benefit via unblocking of postponed business investment, we would argue that the market has become far too negative on the AUD, partly via assumptions that the RBA is constrained by rising mortgage rates or falling house prices," CIBC's Stretch writes, in a recent note to clients.

Stretch and the CIBC team say the market's bet against the Australian Dollar is "too excessive", sentiment is "too pessimistic" and its assumption that the Reserve Bank of Australia (RBA) will not raise its interest rate from the current record low of 1.5% until the end of 2019 is "too pessimistic".

They say the Aussie could rise more than 5% against the Canadian Dollar over coming months. TD Securities has a similar view.

"We believe that AUD has priced in a chunky risk premium on the US/China trade spats," McCormick writes, in a note to clients last week. "A proxy index for China stress also shows that AUDUSD is trading near the implied levels while AUDCAD should be trading around 0.9340. We think AUD is trading with a heavy risk premium while CAD reflects plenty of good news."

McCormick and the TD team are looking for a move up to the 0.96 level for the AUD/CAD rate and have a stop-loss set at 0.9040. The AUD/CAD rate was quoted 0.24% higher at 0.9256 Wednesday.

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