Year-End Outlook: Caution on Canadian Dollar – NBC

Two-year yield spreads and Gold have stronger links to Canadian Dollar (CAD) volatility, according to National Bank of Canada (NBC) strategist Kyle Dahms. His analysis also identifies a modest positive correlation with WTI. Expectations that the Bank of Canada (BoC) will raise rates while the Federal Reserve holds steady have narrowed Canada’s yield disadvantage, he argues. Risks from commodities, rates and trade tensions nevertheless leave him cautious on the Canadian Dollar through year-end.

Rate spreads underpin Loonie recovery

"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. Learn more.)