One of the best-performing currencies in 2023, the Canadian Dollar, could be set to extend its current strength in the near-term according to analysts at ING Bank.
“The Canadian dollar has been one of the better G10 performers this year and, like the Mexican peso, is buoyed by a healthy risk-adjusted yield,” says Chris Turner, Global Head of Markets at ING Bank.
This robust yield acts as a pillar of support, helping the CAD navigate the choppy waters of currency markets.
Market opinion is divided over the Bank of Canada (BoC) continuing its monetary tightening cycle. With the BoC’s policy rate at 4.75%, some question whether the Bank needs to proceed with tightening in July.
“On the subject of yields, the market is split on whether the Bank of Canada needs to push ahead with its tightening cycle in July,” he adds.
Despite the historically low unemployment rate in Canada, Turner believes corporates might still have some scope to increase prices or regain profit margins.
He adds, “With Canada’s unemployment rate still relatively low by historical standards, corporates may still see opportunities to push on higher prices or restore profit margins.”
The CAD’s resilience in the face of a potentially stronger US dollar may be tested, but Turner remains confident, expecting the Canadian Dollar to keep up its performance.
Meanwhile, Valentin Marinov, Head of G10 FX Research and Strategy at Crédit Agricole, warns of risk to the CAD’s strength relating to commodity prices.
Marinov indicates that, despite the recent CAD strength, the Canadian dollar could potentially weaken if commodity prices decline or risk sentiment turns negative.
“The Canadian dollar has outperformed recently thanks to strong crude oil prices and resilient risk sentiment,” says Marinov, “But the currency could underperform if commodity prices retreat, or if risk sentiment turns south.”
Shaun Osborne, Chief FX Strategist at Scotiabank, underscores the significance of the CAD’s recent price action and points to key levels to watch.
“Short-term trends continue to suggest the CAD may weaken in the near term, but longer-term charts suggest any weakness should prove temporary,” says Osborne.
He maintains that any CAD depreciation may be short-lived, presenting potential buying opportunities for investors.
