Fundamental bias: Bullish


1. The Monetary Policy outlook for the BOC

At the April meeting the BOC confirmed market’s speculation that they will start tapering their QE program, and followed through with a CAD1bln reduction per week. The bank also took a hawkish tilt by bringing forward their interest rate hike expectations to 2022 from 2023. The BOC is the first major central bank to step away from the ultra-easy policy put in place due to the pandemic. As long as the virus situation does not deteriorate meaningfully the bank is set to continue normalizing policy and potential hike rates in 2022. At a press conference this week, Governor Macklem explained that they have taken notice of the recent strength of the CAD. The Governor said that it’s something they are looking at and if the currency moves a lot higher (especially versus the Dollar) it could have ‘a material impact on its outlook and how we set monetary policy’. Even though this doesn’t change the bullish bias for the currency, it does mean that any further appreciation will be watched by the market and could spark some cause for concern. Thus, as a precaution, and alongside the extension of Ontario’s stay-at-home order, we have updated our previous strong bullish bias to bullish .

2. Commodity-linked currency with dependency on Oil exports

Oil staged an unprecedented recovery after hitting rock bottom in 2020. The move higher has been partly driven by (1) supply & demand (OPEC’s production cuts); (2) improving global economic outlook (vaccine roll out and monetary and fiscal stimulus induced recoveries); (3) rising inflation expectations (reflation). Even though further gains will be an uphill battle after the push higher, the bias remains positive in the med-term as long as the supportive factors and drivers remains intact and should be supportive for the CAD in the med-term .

3. Developments surrounding the global risk outlook.

As a high-beta currency, CAD has benefited from the market's improving risk outlook over recent months as participants moved out of safe-havens and into riskier, higher-yielding assets. Also, as a pro-cyclical currency, the CAD enjoyed upside alongside other cyclical assets after moving into an early post-recession recovery phase with expectations of global synchronized recovery. Even though the risks remain surrounding the virus and thus global economic outlook, the success of the global vaccination roll out should prove supportive for the CAD.