CAD: July surprise - NBF

The Canadian dollar shrugged off slumping oil prices and increased speculative short positions to gain 1% against the USD during July, points out the analysis team at National Bank Financial.

Key Quotes

“And that despite largely unchanged interest rate spreads with the U.S. So, what exactly propelled the loonie last month? Capital inflows, which have been weak in the first half of the year, may have bounced back especially if investor sentiment about Canada’s prospects improved. But because timely data is not available on capital flows, we’ll have to wait a few months before confirming or rejecting that possibility.”

“If capital flows were the reason for the C$’s surprise gains in July, then one can hardly be optimistic about the loonie’s near term prospects given the increased likelihood of a reversal of those flows.”

“Our forecast for the loonie to appreciate after Q3 is based on a trade deal being reached by Washington and Ottawa, something that admittedly may not happen this year.”

“Could firmer oil prices save the loonie, even amidst persistent trade tensions? We’re somewhat skeptical given the diverging trajectories of oil prices and the C$ this year.”

“As it turns out, the impact of unfavourable Canada-U.S. interest rate spreads has supplanted positives associated with higher oil prices.”

“So, should a trade deal materialize, the Canadian dollar’s appreciation could be significant. The evaporation of trade-related uncertainties would brighten the economic outlook, increasing odds of policy tightening by the Bank of Canada and hence improve Canada-U.S. interest rate spreads. That would in turn allow the loonie to move closer to levels consistent with current oil prices. For now, we are keeping unchanged our target range of 1.25-1.35 for USDCAD for the next 12 months.”