Canadian Dollar: Cautious outlook into year-end – NBC

National Bank of Canada (NBC) strategist Kyle Dahms analyzes recent Canadian Dollar (CAD) volatility, noting modestly positive correlation with WTI but stronger links to Gold and two-year yield spreads. He argues that expectations of a Bank of Canada (BoC) hike versus a Federal Reserve hold have narrowed Canada’s yield disadvantage. However, he remains cautious on the Canadian Dollar through year-end given risks from commodities, rates and trade tensions.

Loonie recovery tied to rate spreads

"The Canadian dollar has whipsawed in recent months as rising oil prices competed with shifting interest rate differentials against the U.S., and volatility in gold prices."

"In our view, the narrowing rate gap offers a more convincing explanation for the recent recovery."

"Expectations of a Bank of Canada hike this Wednesday, alongside a Federal Reserve hold, have accompanied a narrowing of Canada’s yield disadvantage and a partial reversal of the loonie’s earlier losses."

"With a Canadian hike already substantially anticipated, further support may depend more on guidance about subsequent moves than on the decision itself."

"More durable appreciation, in our view, will require an easing of trade tensions and a sustained narrowing of Canada’s yield disadvantage."

"We therefore remain cautious on the Canadian dollar through year-end."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)