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CAD Passes Peak-Pessimism

Canadian Dollar passes peak pessimism

Until the end of last week, the Canadian dollar was the worst performing major currency of 2017.

The Pound to Canadian Dollar exchange rate has risen to multi-month highs around 1.78 while the US to Canadian Dollar exchange rate attempted to test 1.38.

The reason for this dire performance was the decision by investors to ignore improving Canadian economic data and instead followed the Bank of Canada’s lead in focussing on the negatives such as concerns about the housing market, trade access to the U.S., and slumping oil prices.

But, the period of depreciation might have come to an end one analyst tells us.

“Thanks to today’s decision by Saudi Arabia and Russia to extend oil production cuts to next year, the loonie seems to have found some breathing room,” says Krishen Rangasamy at the National Bank of Canada.

Oil exports make up a great portion of Canada’s foreign exchange earnings basket and it goes that higher oil prices correspond to greater foreign exchange earnings which in turn props up the value of the Canadian Dollar.

Oil prices have jumped to their highest level in more than two weeks after the Saudi Arabian and Russian energy ministers said they are in favour of extending a production-cut deal for nine months.

The ability of these price gains to stick obviously have implications for CAD moving forward.

“While we remain skeptical about the success of such bilateral deals to reduce the oil supply glut ─ increased production by the U.S., Canada and Iran among others will compensate ─ we welcome the temporary floor that the announcement has put under the loonie,” says Rangasamy.

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Rangasamy believes CAD could be under renewed pressure over the coming months if, as he expects, incoming data shows a sharp moderation in Canadian GDP growth after Q1’s blockbuster performance.

A relapse for oil prices, and the Fed delivering two additional interest rate hikes before year-end could also leave the currency exposed to weakness.

“But there is reason to be optimistic for the loonie longer term. We expect a more hawkish tone from the Bank of Canada later in the year in response to a second half rebound for growth and the need to cool a hot housing market,” says Rangasamy.

NBC believe that any Canadian Dollar appreciation could be amplified as speculators reverse their short positions.

“Looking at the record speculative shorts on the Canadian dollar one could argue that, assuming the economy does not implode, it’s becoming more and more difficult to top that level of pessimism on the Canadian dollar,” says Rangasamy.

The GBP/CAD exchange rate is seen trading down at 1.7615 at the time of writing and certainly has a softer appearance when compared to its recent strong run.

"GBP/CAD retains a soft undertone. The Pound formed an inside range week against the CAD overall last week, suggesting that the 2017 rally may be pausing," says technical analyst Shaun Osborne at Scotiabank.

The same goes for USD/CAD which is seen at 1.3644 at the time of writing.

"We rather think that, having made a break under 1.3650/55, the USD is liable to correct a little more obviously now. A 50% correction of the Apr/May rally would see spot drop to 1.35—effectively a retest of the bull break out signal from late April that remains valid and still suggests medium-term risk towards 1.39/1.40," says Osborne.

 

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