Canadian Dollar: Fragile recovery tied to US – Commerzbank

Commerzbank FX analyst Michael Pfister highlights that the Canadian Dollar’s recent weakness contrasts with a fragile recovery in Canada’s real economy. Labour market data, Gross Domestic Product (GDP) surprises and stronger PMIs point to improving conditions, while CAD remains heavily influenced by Oil prices and relatively unattractive Canadian interest rate expectations versus the US. Commerzbank’s forecasts see EUR/CAD around 1.60–1.62 and USD/CAD easing toward 1.35 by late 2027.

CAD recovery versus oil and US risks

"It has now become a familiar picture: the Canadian dollar is once again among the worst performers of the G10 currencies this year. But the conditions were actually much more favourable this time around. The Bank of Canada had practically exhausted its scope for further interest rate cuts, and the conflict in Iran had driven energy prices significantly higher, which benefits Canadian exports."

"These expectations have since been revised by the market, with expectations for the BoC now falling even behind those for the Bank of Japan. This is one of the main reasons for higher USD/CAD levels: fewer interest rate hikes are expected from the Bank of Canada, while more are priced in for the Fed."

"The performance of the Canadian dollar has understandably been closely linked to the oil price in recent months. This trend is likely to continue unless the Strait of Hormuz is kept open on a sustained basis. Volatility in the oil markets, however, has obscured the fact that the Canadian real economy has begun a fragile recovery in recent months. The relationship with the US remains crucial to this upturn, and thus as well as to the Canadian dollar."

"Leading indicators suggest that this trend is likely to continue. The Purchasing Managers' Index for the manufacturing sector has stabilised firmly in expansionary territory, and exports have also increased recently. In short, even though we only have a few months' worth of data so far, it seems that the Canadian real economy is improving again, at least for the time being."

"We remain fundamentally optimistic that this recovery will be more sustainable this time and that the Canadian dollar will finally start to appreciate again in the coming months. But it will likely be a long road, with setbacks caused by the US President along the way."

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