Canadian dollar rises for the third day as it hits a three-week high
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The Canadian dollar has quickly wiped out the March swoon, and for good reason.
The Bank of Canada paused rate hikes before the banking turmoil and since then, the terminal rates for other central banks have come down. Meanwhile, the BOC had already signalled it was comfortable where it was. The result is that the expected spread between the Canadian central bank and others has narrowed in favor of the BOC.
In addition, worries about the global economy have diminished since the height of the banking panic. Finally, oil rebounded after breaking through the bottom of the range.
Technically, USD/CAD is now right at the 50% retracement of the February rally.
USD/CAD stalled today just below the 50% retracement and there’s also a minor low from early March in play
The question is whether USD/CAD can get all the way back to 1.3275? I think it could be a tough slog. As the banking situation improves and markets stabilize, the bigger move to take place will be pricing in higher Fed funds for longer. At the same time, the Canadian economy continues to face a tough challenge from the struggling housing market and spillovers from higher rates to consumer spending.
With that, the US economy is highly likely to outperform Canada this year and the Bank of Canada will ultimately be cutting rates before the Federal Reserve.
If the loonie is going to outperform, it will be on commodity strength and that’s not wholly impossible. The oil market will tighten in H2 and metals look strong as well. China’s reopening hasn’t been a blockbuster but it could pickup in H2, lending support to the loonie and allowing for stronger Canadian terms of trade.
However in any of those scenarios, I’d prefer buying CAD against the yen or European currencies. Perhaps a further retracement can run through quater-end but I don’t see a lasting loonie rally.