Canadian Dollar: Why Is NBC Cautious About the Year-End Outlook?

Caution remains warranted on the Canadian Dollar (CAD) through year-end, according to National Bank of Canada (NBC) strategist Kyle Dahms, given risks from commodities, interest rates and trade tensions. In his analysis of recent CAD volatility, Dahms finds a modest positive correlation with WTI, but stronger relationships with Gold and two-year yield spreads. Expectations that the Bank of Canada (BoC) will raise rates while the Federal Reserve stays on hold have, he argues, reduced Canada’s yield disadvantage.

Are narrower rate spreads driving the loonie’s 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."

(An editor reviewed this article, which was produced with assistance from an Artificial Intelligence tool. Learn more.)