Invesco Canada blog

Insights, commentary and investing expertise

Currency outlook: Global growth, policy convergence support longer-term U.S. dollar weakness


October 13, 2017
Subject | Institutional | Macro views

The Canadian dollar’s rally since May could be described as relentless. We view the Bank of Canada (BOC) as currently the most hawkish developed market central bank, having hiked its overnight rate by 0.25 percentage points in two back-to-back meetings, bringing its policy rate to 1.00%.1

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Currency outlook: CAD rally continues

The Canadian dollar has rallied significantly this year following the Bank of Canada’s (BoC) switch to a hawkish tilt. The combination of reasonably strong growth and the expressed intent of the BoC to remove both emergency rate cuts from 2015 left the market covering shorts in the Canadian dollar. The extreme rally has left the currency susceptible to a short-term retracement, in our view.

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Currency outlook: Strong global growth drives central bank policy convergence

The Canadian dollar has been in a slow decline over the last year. While the Bank of Canada increased the benchmark interest rate, as expected, by 0.25% (to 0.75%) at its July meeting, oil prices appear to have peaked for the year due to increased U.S. oil production, presenting a headwind for the currency.1 We are neutral on the Canadian dollar, and concerns about overleveraged Canadian consumers leave us looking for opportunities to short the currency.

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Currency outlook: Strong global growth mixed for U.S. dollar

The Canadian dollar has been in a slow decline over the last year, but has shown strength recently. As growth rebounded in the first quarter, the Bank of Canada (BoC) appears to be becoming concerned that excess capacity may be declining faster than they would like. While oil prices appear to have peaked for the year due to U.S. oil production, there has been little effect on the currency. We remain underweight the Canadian dollar due to the overleveraged Canadian consumer, but we are monitoring the recent hawkish BoC rhetoric closely.

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Currency outlook: Continued CAD volatility

The Canadian dollar weakened significantly in April, breaking out of its one-year range. A combination of factors contributed to the weakness. Higher U.S. oil production and lower oil prices have put pressure on the Canadian currency. The announcement of U.S. tariffs on Canadian softwood exports has also been a factor. Third, the recent liquidity problems of a Canadian subprime mortgage lender have played a role. Despite the recent strength in the latter half of May, we believe weakness in the Canadian dollar is likely to continue.

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