Bullish CAD Outlook Over Long Term Amid Rising Oil Prices; However, NAFTA Presents Biggest Risk

CAD Analysis and Talking Points

  • CAD Bulls likely to cheer rising oil prices, which trade at 4yr highs.
  • Strong Canadian Data Supports BoC rate hikes, however, NAFTA will ultimately decide whether the BoC hikes

See our Q2 CAD forecast to learn what will drive the currency through the quarter.

Rising Oil Prices Provides Support for Canadian Dollar

Geopolitical instability continues to be the overriding theme for rising oil prices, in which Brent Crude futures has risen over 15% this year, hitting its highest level since November 2014. Yesterday’s reports that the US exit the Iran Nuclear Deal and reimpose sanctions (after August 4th and November 4th) on Iran sent Brent Crude above $77/bbl, subsequently this provides a tail risk for oil prices with Iranian oil exports expected to be hit by US sanctions, which in effect could lead to supply disruptions of up to 1mln bpd. In turn, the rise in oil prices will likely provide upside risks for commodity currencies, in particular the Canadian Dollar, which could be supported in the long term given that it is typically sensitive to oil price shocks due Canada’s dependence on oil.

Source: Thomson Reuters

Strong Canadian Data Supports Further Rate Hikes

Aside from the rise oil prices, Canadian data has also been impressive as of late, most notably Friday’s Ivey PMI data on Friday, which rose to the highest level since March 2013 at 70.4. That said, inflation has also risen to 2.3% (highest in 3 years), above the Bank of Canada’s 2% midpoint of their 1-3% target range, while last week’s saw the latest GDP report print ahead of expectations (0.4% vs. Exp. 0.3%). The recent strong data had also been acknowledged by BoC Governor Poloz who stated that “economic progress makes the BoC more confident that higher interest rates will be warranted over time”. Subsequently, this has kept CAD supported with OIS markets (Overnight Index Swaps) pricing in around 22bps of tightening by the July monetary policy meeting, keeping the Canadian Dollar firm.

Source: Thomson Reuters

NAFTA Presents Biggest Risk to CAD

The biggest risk to the Canadian Dollars outlook and ultimately what will decide whether the Bank of Canada delivers further rate hikes is NAFTA. Negotiations have been ongoing for over 8-months with no sign of a major breakthrough, however, trade officials from Canada, Mexico and the US have hailed that progress has been made. Focus over the coming weeks is whether the officials can reach an agreement in principle, if so, this will be cheered among CAD bulls and provide a bullish outlook for the currency.

Potential Avenues of Bullish CAD Positions

EURCAD: Risks continue to be skewed to the downside for EURCAD, given that the Euro continues to be weighed by the run of uninspiring data points, which is likely to push back the ECB’s announcement for its next policy shift. Additionally, the bullish outlook for oil prices could see CAD notably firmer against EUR. EURCAD looking to target near term support at 1.52477, which is the 38.2% Fibonacci Retracement of the 1.3783-1.6152 rise (2017 low-2018 peak), while a longer-term target is seen at the 200DMA (1.5193). On the topside, the 2017 high (1.5372) could act as resistance. Reminder, Relative Strength Index is in oversold territory which could leave EURCAD as risk of a pullback.

USDCAD: Yesterday saw the pair fall just shy of the psychological 1.30 level, potentially providing a top in the near-term and also suggesting a lack of buying interest above 1.30. However, the main question for USDCAD is whether the recent gains in the USD-index will run out of steam.

IG Client Positioning Sentiment states recent changes in sentiment warn that current USDCAD price trend may soon reverse lower. For full client positioning click here


Chart by IG

— Written by Justin McQueen, Market Analyst

To contact Justin, email him at Justin.mcqueen@ig.com

Follow Justin on Twitter @JMcQueenFX

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