Canadian Dollar Outlook: Goldman Sachs Stay Bullish

- CAD outlook constructive says Goldman Sachs
- Oil market dynamics to provide support
- GBP/CAD chart hints at Sterling upside says Exchange Bank of Canada

Canadian Dollar outlook

Image © Bank of Canada

  • GBP/CAD spot at publication: 1.7418
  • Bank transfer rates (indicative guide): 1.6808-1.6928
  • FX transfer specialist rates (indicative): 1.7000-1.7250
  • More information on specialist rates, here

Foreign exchange analysts at Goldman Sachs say they continue to back the Canadian Dollar to advance over the forseeable future. 

In a weekly client briefing, strategists at the Wall Street bank's research desk say they prefer to "stick with longs", when it comes to approaching the Canadian currency.

A "long" is a trade that seeks to benefit when an asset appreciates in value.

"Our trade recommendation to short the Dollar versus an equally-weighted basket of the Canadian Dollar and Australian Dollar remains our favourite way to express our above-consensus global growth views in G10 FX," says Zach Pandl, a senior economist at Goldman Sachs in New York.

"CAD, in particular, should continue to participate in broad Dollar weakness, benefiting from its effective virus control, as well as its high beta to global growth and oil prices, and the policy outlook," he adds.

The Canadian Dollar remains a mixed performer in the global foreign exchange marketplace, with the currency actually underperforming all of its G10 peers, apart from the Norwegian Krone over the course the past week.

The Krone is a 'high beta' currency that has a strong relationship with the performance of global stock markets, tending to rise when investors are buying stocks but fall when the reverse is true. This relationship owes itself to Norways strong oil export credentials which sees the currency rise when oil prices are on the rise. Oil prices, like stocks, tend to benefit when investors are in a buoyant mood.

CAD performance

CAD relative performance, image copyright Pound Sterling Live.

The Canadian Dollar is alongside the NOK also classed as an oil currency, owing to the significant exports that come out of the country's oil sands regions.

Therefore, that NOK and CAD have underperformed over the past week nod towards the importance of oil market performance for these two currencies. The Pound-to-Canadian Dollar exchange rate has risen on the back of CAD underperformance to reach 1.7402, having been as low as 1.72 in early January and 1.6769 in mid-December.

But, Goldman Sachs see a pick up in global economic activity in 2021 as the covid-19 pandemic fades owing to a global vaccination programme, which should benefit oil prices and the Canadian Dollar.

"Our above-consensus growth views should also support a continued rally in oil prices in 2021, reinforced by additional fiscal stimulus in the US, benefiting CAD and currencies of other oil-exporters," says Pandl.

On the matter of domestic drivers pertaining to the Canadian Dollar's outlook, Goldman Sachs tell clients they view the virus as being relatively well-controlled in Canada, and vaccinations are shoring up the country's fight.

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"Recent delays to vaccine deliveries reflect only temporary supply constraints, as a production plant is re-tooled to boost capacity, and some provinces have reversed earlier decisions to hold back second doses, which initially resulted in comparatively slow distribution," says Pandl.

The Bank of Canada (BoC) is meanwhile seen as being a potentially positive source of support in 2021, having been a notable drag in 2020.

"The relative monetary policy outlook should also favour CAD in the medium-term. While the Bank of Canada left its current policy stance unchanged, the statement hinted at upcoming tapering," says Pandl.

The BoC last week said it would seek to exit its policy of offering extraordinary monetary policy support a=should "the economy and inflation play out broadly in line or stronger than projected."

The Canadian Dollar rose on Wednesday Jan. 20 after the BoC stayed itscourse by leaving the cash rate unchanged following its latest meeting, surprising some parts of the market, and continuing its commitment to quantitative easing.

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Canada's central bank left the cash rate unchanged at 0.25% following January's meeting of the Governing Council and committed to continue buying "at least $4 billion per week," of Canadian government bonds in a bid to see the low cash rate passed on to households and companies.

Canada's rate setters cited the earlier than anticipated rollout of coronavirus vaccines as grounds for optimism about the economic outlook.

"We think the signal is consistent with our forecast for tapering in Q3 of this year, earlier than our expectation for Fed tapering in early 2022. We also continue to expect BoC liftoff in 2024Q2, and see risks skewed closer to the BoC’s 2023 timeline," says Pandl.

The GBP/CAD exchange rate is meanwhile in focus ss it appears to be at a critical technical juncture.

Analysis from Eric Bregar, Head of FX Strategy at Exchange Bank of Canada, says "pressure mounting for GBPCAD upside after two-year long triangular consolidation."

Bregar presents the following graph:

GBP to CAD chart

Those watching GBP/CAD should keep an eye on the chart with regards to the above over coming days.


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