The Canadian dollar has been the third best-performing G10 currency against the USD over the past month. Evidence that crude oil prices may have found their lows in August, combined with a recent firming in domestic economic data, has provided major support for the currency. Now that Federal Elections are out of the way focus will turn to monetary policy.
Canada's central bank left its key policy rate on hold in September at 0.50%, sounding more neutral after reducing its policy rate twice this year, noting that weak crude oil prices were likely to have only a transitory impact on inflation. While that may be the case, the negative impact of low crude oil prices on the oil & gas sector and wider economy has been sustained, with GDP contracting for two straight quarters in a row this year.
"Given this, it is believed that the market may be attaching too low a probability to further rate cuts over the coming months. While our forecast of higher crude oil prices should provide some further support to the Canadian dollar to around 1.25-1.20 against the USD, the possibility of further monetary easing suggests a return to 2014 sub-1.20 levels may be a stretch", argues Lloyds Bank.
