Commerzbank’s Michael Pfister notes that the Canadian Dollar (CAD) has received temporary support from higher oil prices, which have contributed to a short-term appreciation of the currency. However, Pfister cautions that this relief is likely to be short-lived unless the Canadian real economy demonstrates a sustainable recovery, which would be necessary to pave the way for interest rate hikes by the Bank of Canada (BoC) [1].
The upcoming United States-Mexico-Canada Agreement (USMCA) negotiations, scheduled to begin in July, are highlighted as a potential source of volatility for the CAD. Pfister points out that while Canada’s reliance on energy exports might suggest the CAD would outperform the USD during an oil price shock, the close economic ties between the two countries mean the CAD rarely decouples from the USD’s performance [1].
Currently, USD/CAD is trading at Commerzbank’s forecast rate of 1.37 for the end of September. The bank maintains this forecast for the first half of the year, citing the fragile Canadian economy and the uncertainty surrounding the USMCA negotiations as reasons for caution. Commerzbank expects that lower USD/CAD levels will only materialize in the second half of the year, once there is greater clarity on the timing of BoC rate hikes and the outcome of the trade negotiations [1].
Overall, the market implication is that while the CAD may see some short-term support from oil prices, significant downside for USD/CAD is limited until economic and policy uncertainties are resolved.
CONCLUSION
Commerzbank anticipates limited downside for USD/CAD in the near term, maintaining a 1.37 forecast for the first half of 2024. The bank expects more meaningful CAD appreciation only after greater clarity emerges on Bank of Canada rate hikes and the conclusion of USMCA negotiations.