Canadian dollar near-term outlook

The Lonnie has strengthened against the USD on Monday as oil prices spiked to their highest level since late April after the large oil producers – Russia and Saudi Arabia – agreed to extend the supply cut deal for another nine months.

OPEC-led output curbs and talks over extension of the current production cut agreement will further support oil prices and commodity-sensitive CAD (the historically close link between the Canadian dollar and oil prices has strengthened in recent weeks).

The Canadian dollar’s outlook was less optimistic last week when Moody’s Investors Service downgraded the 6 nation’s banks for the first time in more than four years. Moody’s provided a rationale for their actions in their statement accompanying the decision to lower the long-term debt and deposit ratings. Moody’s noted that Canadian private sector debt amounted to 185% of the country’s GDP at the end of the last year. House prices soared despite the government’s desperate efforts to cool the market. A marked growth in Canadian consumer debt and heightened housing prices make consumers and Canadian banking industry more vulnerable to downside risks the nation’s economy face, Moody’s analysts note. Canadian government holds an opposite view. According to Canadian policymakers, the country’s financial sector is resilient and well-capitalized. The six downgraded banks have strong capital and liquidity, supported by their profitability, so there is no reason for Canadians to worry about their assets.

Another negative factor that affects Lonnie’s performance is growing concerns over the US protectionism that may lead to the disruption of US-Canada trade relationships developed under the North American Free Trade Agreement.

The following factors won’t allow the CAD to strengthen against its major peers in the near-term and long-term future. The recent appreciation of the Loonie will likely be short-lived. So, we would rather bet for a modest depreciation of the Canadian dollar in the upcoming months, than going long on CAD.