Loonie to advance nicely as monetary policy and commodities hold advantages – Commerzbank
The more nervous markets since the invasion of Ukraine bring increased CAD volatility. In the medium-term, the loonie should benefit from its status as a commodity currency and from the more active stance of the Bank of Canada compared to the European Central Bank (ECB), economists at Commerzbank report.
Uncertainty likely to dominate for now
“The nervousness on the markets since the invasion of Ukraine brings increased volatility. Since then, the loonie has gained against the EUR. The distance to the trouble spot and its status as a commodity currency give it a safe-haven glimmer as well. We expect these factors to weaken when the war comes to an end. The EUR recovery we expect from the summer onwards should therefore push EUR/CAD up.”
“The key factor for USD/CAD is how the market views the BoC's stance compared to the Fed. If it is perceived as more hawkish and rate hike expectations change correspondingly, the loonie should benefit - conversely, it should lose accordingly.”
“With the continued tightening of monetary policy in 2023, the BoC is likely to differ from the ECB. We expect the latter to end its rate hike cycle again early in 2023, which should contribute to renewed EUR weakness. Accordingly, we expect a more pronounced downward movement in EUR/CAD than in USD/CAD in 2023.”
“Canada is likely to benefit from the significant rise in commodity prices – which is also benefiting the CAD. At the same time, however, there is a risk that the loonie will have to give up at least some of its gains if there are downward corrections with regard to the drastic increases in commodity prices.”
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FXStreet Insights Team
FXStreet
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