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Canadian Dollar Underpinned by Jump in Oil Prices

December 19, 2023 - Written by David Woodsmith


GBP/CAD Exchange Rate Dips to 5-Week Lows

Higher oil prices helped underpin the Canadian dollar on Monday and markets remain confident over Federal Reserve rate cuts in the first half of 2024. The US Dollar to Canadian dollar (USD/CAD) exchange rate dipped to 4-month lows at 1.3350 before a recovery to 1.3400.

The Pound to Canadian Dollar (GBP/CAD) exchange rate also retreated to 5-week lows at 1.6900 before a recovery to 1.6930.

Overall risk conditions also remained benign with equities making net gains on hopes that there will be a soft landing for the US economy and significant rate cuts in 2024.

Oil prices posted net gains on Monday amid underlying Middle East tensions.

A Norwegian-owned vessel was attacked in the Red Rea on Monday and BP stated that it has temporarily paused movement through the Red Sea. This followed the move by Maersk late last week to suspend shipping.

Tamas Varga of oil broker PVM commented; "The rise in geopolitical risk premium, which has come in the form of regular hostilities towards commercial vessels in the Red Sea by Iran-backed Houthi rebels plays its indisputable part in oil's resurrection."

After sliding to 4-month lows last week, crude oil rallied to 2-week highs on Monday with Brent close to $74.0 p/b.

New York Fed President Williams pushed back against market expectations of interest rate cuts, but there was little net change in market pricing.

Markets have priced in over a 96% chance that interest rates will be cut at the May policy meeting.

According to ScotiaBank, the Fed will not be able to put the genie back in the bottle; “the bottom line is that Chairman Powell failed to push back on market pricing last week when most people expected him to and the Fed can’t now un-ring that particular bell.”

Canadian inflation data will be released on Tuesday. Consensus forecasts are for the headline annual rate to decline to 2.9% from 3.1% previously.

Markets are also expecting a small decline in core inflation rates for the month.

Domestically, Bank of Canada comments and guidance will remain under scrutiny.

At the end of last week, Governor Macklem stated that the time of policy decisions has been altered to 9.45ET from 10.00 and press conferences will follow every meeting from now onwards compared with every other meeting.

As far as interest rates are concerned; “The governor noted progress on inflation but said policymakers were still considering whether rates were restrictive enough and that it was too soon to talk about lower rates.”

According to Scotiabank real rates will be important; “Progress on prices and a central bank that is not yet ready to “pivot” should add to CAD support.”

Scotiabank added; “Ultimately, after repeated failures in the 1.39 area, trends appear to be geared towards a retest of 1.31 low seen in July but that may come after a moderate USD rebound early next year. Intraday resistance is 1.3400/10. Support is 1.3350.”

NBF, however, is notably bearish on the longer-term Canadian economic outlook; “Looking ahead, we don't see much support for the CAD given our forecast for a slowing global economy and the potential for more aggressive interest rate cuts in Canada relative to the US due to weaker domestic demand.”

It adds; “Given our recession scenario for the Canadian economy in H1 2024, we now expect USD/CAD to move towards 1.45 in the coming quarters and don't see much room for CAD appreciation until the second half of 2024.”

Rabobank expects fundamental forces will be relatively balanced which will limit moves for the Canadian currency; “We expect the US and Canadian monetary policy cycle to remain closely linked, providing somewhat limited direction for USD/CAD.”

For next year it added; “However, we expect some retracement of the recent USD weakness and further upside for oil prices in the new year. These will likely counteract each other to an extent, and as such, we expect a relatively flat path for USD/CAD.
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