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Commerzbank analyst Michael Pfister predicts the Canadian Dollar will appreciate against the U.S. Dollar, Pound and Euro over the coming months.

The Canadian Dollar has further upside potential in the coming months, says the analyst in a new research briefing that indicates recent stability around 1.35 USD/CAD can give way amidst a broad-based advance.

"The fact that it has not fallen further, despite the BoC continuing to sound quite cautious, is probably mainly due to the very hawkish Fed and the strong US data," Pfister notes. "Nevertheless, we see potential for lower levels in the coming months."

Pfister highlights recent developments, including the Bank of Canada's decision to leave interest rates unchanged at 5% in January and the removal of reference to another rate hike from its statement. He remarks, "This cautious approach supported the CAD."

However, USD-CAD has seen a slight uptick recently, attributed to "surprisingly hawkish comments by Fed Chairman Jerome Powell," Pfister explains. Yet, Pfister anticipates a shift in the USD-CAD dynamic in the near term.

"With the very low level of US inflation, the Fed will probably cut interest rates, weighing on the US dollar," Pfister suggests. "On the other hand, the BoC is likely to stick to its cautious approach and start cutting rates a bit later."

Pfister underscores the importance of inflation development in Canada, noting its recent decline but suggesting that the Bank of Canada may wait before making significant rate adjustments. "Recent data releases have kept alive the faint hope of a soft landing for the Canadian economy," Pfister observes, citing stable unemployment rates and strong job growth in January.

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"While we remain comfortable with our forecast of lower USD-CAD levels in the coming quarters," Pfister says, "we have adjusted the levels slightly higher to reflect the new forecast from our economists."

However, Pfister tempers expectations for further CAD appreciation against the USD in 2025.

"The Fed is likely to end its interest rate cuts earlier than the market currently expects," he explains, "and our economists anticipate very strong US growth." Despite potential growth in the Canadian economy, Pfister suggests it may not be enough to withstand the anticipated US growth.

Commerzbank forecasts the USD/CAD exchange rate at 1.33 by mid-year and 1.03 by year-end. The Euro to Canadian Dollar exchange rate is forecasted at 1.45 and 1.43 for these respective targets.

The bank's Pound to Canadian Dollar exchange rate forecast is 1.66 by the end of June and 1.6250 by the end of the year.