USD/CAD: Higher oil price and yields support stronger loonie – MUFG

The USD has extended its rebound over the past week supported by the move higher in US yields which is triggering a broader correction lower in risk assets. The two exceptions have been the CAD and NOK which have both strengthened. The higher price of oil and favourable yield spread developments continue to favour a stronger CAD, economists at MUFG Bank inform. 

Key quotes

“The oil-related currencies have been supported by recent bullish developments in the oil market. The strength of oil-related currencies is not yet fully reflecting the higher price of oil. Positive correlations have broken down over the past month.”

“The CAD is benefitting from improving domestic fundamentals as well. The Canadian economy continued to rebound much more strongly than expected at the end of last year when GDP expanded by an annualized rate of 9.6% in Q4 following on from the 40.6% expansion in Q3.” 

“The BoC is expected to acknowledge the stronger growth outlook at this week’s policy meeting. It is encouraging expectations that the BoC will eventually bring forward plans to tighten policy. Long-term yields in Canada have increased by even more than in the US so far this year. The BoC will face a difficult challenge if it wants to dampen the pace of the move higher in Canadian yields in the week ahead in light of improving fundamentals. The BoC is likely to reiterate that it does not plan to raise rates until 2023 at the earliest.” 

“The main downside risk in the near-term would be a deeper correction in global risk assets which temporarily undermines support for the CAD from favourable fundamentals.”