CAD likely to appreciate against USD in medium to long term, says Commerzbank

In 2016, the Canadian dollar was one of the most robust currencies in the G10 universe along with the U.S. dollar. This was greatly because of the increase in oil prices. But this is causing risks on the downside in the short-term, noted Commerzbank. The positivity about the production cuts agreed by the OPEC might be overly optimistic and therefore there might be a correction in the oil price that would probably exert pressure on the Canadian dollar.

Furthermore, the U.S. Fed is expected to raise interest rates more notably than the Bank of Canada and therefore the USD will enjoy a rate advantage. As a result, the USD/CAD levels are expected to trend higher again. The Canadian central bank is expected to welcome this development as it has been cautioning that an extremely strong Canadian dollar might soften the price competitiveness of domestic firms and exert additional pressure on exports.

Because of the generally optimistic outlook of the Canadian economy and a satisfactory development of inflation, the BoC is unlikely to tend towards further monetary policy expansion, thereby weakening the Canadian dollar, stated Commerzbank. Meanwhile, the central bank would become increasingly positive and is even likely to raise interest rates for the first time at the end of 2017.

“Medium to long term we expect CAD to gain ground against USD again as the market has priced in Fed rate hikes much more notably than for the BoC” added Commerzbank.

The European Central Bank is likely to stay expansionary for some time to come after it extended its purchasing program until the end of 2017. Thus the CAD is likely to gain against the EUR in the long term.