The Canadian Dollar (CAD) has struggled to make gains despite a recovery in risk appetite. According to economists at Scotiabank, the CAD is unlikely to see much improvement in the near term. Despite the modest tailwind created by the improvement in risk appetite, US-Canada yield spreads across the curve are still unfavourable for the CAD. This, combined with the lack of compelling reasons to push the CAD higher, is likely to result in more choppy range trading between 1.35 and 1.38 for the time being.
To understand the factors that are currently hindering the CAD’s performance, it is essential to examine the broader economic landscape. In recent months, market turmoil and economic uncertainty have created headwinds for the CAD. Concerns over the US-China trade war, a possible global economic slowdown, and Brexit have all contributed to the CAD’s underperformance. Additionally, weaker-than-expected economic data releases and concerns surrounding Canada’s housing market have further eroded investor confidence in the currency.
Despite these challenges, the CAD managed to show some resilience in early November, helped by the Bank of Canada’s (BoC) decision to hold interest rates steady. The BoC’s decision was seen as a positive development for the CAD, as it has been struggling to keep pace with the US Federal Reserve’s rate hikes. However, the CAD’s gains were short-lived as global risk appetite took a hit, causing investors to flock to safe-haven currencies like the US Dollar (USD).
Looking ahead, the CAD’s fortunes are likely to be influenced by a variety of factors. Trade tensions between the US and China are expected to continue to have an impact on the CAD’s performance. The CAD is widely seen as a proxy for global trade, so any developments on this front could create volatility in the currency. In addition, the outcome of Brexit negotiations could also have implications for the CAD. A hard Brexit, for example, could create significant uncertainty for Canada’s economy, which exports a significant amount to the UK.
In terms of economic data releases, there are several key indicators that are likely to influence the CAD’s performance in the coming weeks. The most significant of these is likely to be Canada’s GDP figures, which will be released towards the end of November. The GDP figures will provide insight into how Canada’s economy is performing and could have an impact on the BoC’s future rate decisions. Other important economic indicators include inflation, retail sales, and employment figures.
Despite these potential drivers of CAD performance, Scotiabank’s economists remain cautious about the currency’s prospects. The lack of compelling reasons to push the CAD higher, coupled with unfavourable yield spreads, suggests that the currency is likely to continue trading in a choppy range for the time being. Investors looking to trade the CAD should therefore exercise caution and remain vigilant for any unexpected developments that could impact the currency’s performance.
In conclusion, the CAD’s underperformance is being driven by a combination of factors, including global economic uncertainty, weaker-than-expected economic data releases, and concerns over Canada’s housing market. While the BoC’s recent decision to hold interest rates steady provided some support for the currency, the CAD’s gains were short-lived. Looking ahead, trade tensions between the US and China, the outcome of Brexit negotiations, and key economic indicators will all have implications for the CAD’s performance. However, with the lack of compelling reasons to push the CAD higher, investors should approach trading the currency with caution.
