Canadian Dollar Rally to Run Out of Steam says Analyst

- ABN AMRO says CAD to weaken near-term
- Another bout of oil price and equity market declines ahead

Canadain Dollar

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The Canadian Dollar's rally is forecast to run out of steam by analysts at ABN AMRO who warn the currency will be hit by another bout of market and oil price weakness.

The call comes after a ~8% rally in the value of the Canadian Dollar against the U.S. Dollar since March 19, which marks the point at which markets started recovering from their coronavirus-induced sell-off.

"We expect the Canadian Dollar to weaken in the near-term," says Georgette Boele, Senior FX Strategist at ABN AMRO.

A a multi-week bout of appreciation by the Canadian Dollar has pushed the USD/CAD exchange rate back to 1.34463, which means it is within touching distance of those levels it was located at before financial market stresses started building in early March owing to the rapid global spread of covid-19.

The rebound in value has meant the Pound-to-Canadian Dollar exchange rate has fallen back from a peak of 1.80 to 1.7034, which is right in the middle of a longer-term range than can be traced back to late 2019.

The ultimate driver underpinning the Canadian Dollar's fortunes in 2020 appears to be the performance of stock markets, which are in turn reflective of investor attitudes to risk. Boele notes that in March, when financial markets were in full panic and oil was aggressively sold off, the Canadian Dollar declined by close to 10%.

A subsequent recovery was triggered by the U.S. Federal Reserve which on March 23 said they would engage in unlimited quantitative easing to support the U.S. economy, while unveiling new facilities to ease global dollar funding shortages.

In Canada, the Bank of Canada eased monetary policy aggressively by cutting interest rates by 150 basis points and initiated its own programme of quantitative easing.

"Monetary policy easing by the Fed and other central banks as well as fiscal stimulus have boosted investor sentiment on financial markets and supported major cyclical currencies such as the Canadian Dollar," says Boele. "Moreover, the recovery in oil has given an extra boost to the Canadian Dollar."

It is assumptions on the outlook for equity markets and oil prices that are in turn driving a more subdued view on the Canadian Dollar's outlook at ABN AMRO.

ABN AMRO's energy analyst expects oil prices to decline once more, "and this is negative for the Canadian Dollar," says Boele.

"Second, we expect another risk-off wave in financial markets," she adds. "In such an environment investors will probably buy the U.S. Dollar and sell the Canadian Dollar."

The Canadian Dollar is forecast to weaken into the third quarter, ahead of a more sustained recovery later in the year.

The USD/CAD exchange rate is forecast at 1.40 by the end of the third-quarter 2020, ahead of a decline to 1.38 by year-end.

This gives a GBP/CAD exchange rate of 1.71 by the end of the third-quarter and 1.74 by year-end.

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