Talking Points:

Fundamental Forecast for CAD: Neutral

We remain neutral on the Canadian dollar although we would turn bearish on CAD if the ongoing NAFTA discussions take a turn for the worse.

The two drivers for the Canadian dollar, NAFTA talks and oil prices, are currently pulling in different directions with trade talks impacting negatively on the currency while a strong oil complex continues to offer support. The trade talks between the US and Canada are not going well with U.S. President Trump repeatedly threatening to pull out of the agreement, an action that would severely impact the Canadian and Mexican economies. Any slowdown in growth would curtail the central bank’s ability to continue to raise interest rates, despite the overheating housing market. The central bank meets again on October 25 and expectations of a third 0.25% rate hike in 2017 have recently been pared back.

On the flip side of the coin, the recent strength in the oil market has provided the Canadian dollar with a modicum of support and prevented the Loonie from weakening further. However with US 2-year rates currently trading close to a near decade high of 1.52%, USD/CAD is likely to be bought on any CAD appreciation. The latest Canadian inflation release on Friday October 20 will also be closely monitored ahead of the BOC meeting and may guide USD/CAD in the short-term.

Chart: USD/CAD Weekly Time Frame (June 2016 – October 13, 2017)

Chart by IG