Commerzbank’s Michael Pfister argues that higher Oil prices are giving the Canadian Dollar (CAD) temporary support, but warns that a fragile Canadian economy and upcoming USMCA (United States-Mexico-Canada Agreement) talks could trigger setbacks. The bank keeps a 1.37 forecast for the first half, looking for lower USD/CAD only once Bank of Canada (BoC) hike timing and trade negotiations become clearer later in the year.

Oil shock offers only partial CAD relief

"After years of depreciation, higher oil prices are helping the CAD to appreciate. This is likely to be only a short-term rebound, however, unless the Canadian real economy recovers sustainably, thereby paving the way for interest rate hikes. The USMCA negotiations, which are due to begin in July, will further complicate matters."

"At first glance, one might think that the CAD would outperform the USD in the event of an oil price shock, given that Canada relies much more heavily on energy exports than the US does. However, the CAD rarely manages to decouple from the USD's performance as the two economies are too closely intertwined."

"USD/CAD is already trading at our forecast rate for the end of September. But given the fragile real economy and the approaching USMCA negotiations, setbacks cannot be ruled out. We therefore continue to expect lower USD/CAD levels only in the second half of the year."

"We therefore remain comfortable with our USD/CAD forecast of 1.37 for the first half of the year. It is only once it becomes clearer when the BoC will actually raise rates and the negotiations are concluded that we are likely to see lower levels."

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