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In 2016, the Canadian dollar was one of the most robust currencies in the G10 universe along with the U.S. dollar. This was greatly because of the increase in oil prices. But this is causing risks on the downside in the short-term.
The positivity about the production cuts agreed by the Oil and Petroleum Exporting Countries (OPEC) might be overly optimistic and therefore there might be a correction in the oil price that would probably exert pressure on the Canadian dollar, Commerzbank reported.
Furthermore, the United States Federal Reserve is expected to raise interest rates more notably than the Bank of Canada (BoC) and therefore the USD will enjoy a rate advantage. As a result, the USD/CAD levels are expected to trend higher again. The BoC is expected to welcome this development as it has been cautioning that an extremely strong Canadian dollar might soften the price competitiveness of domestic firms and exert additional pressure on exports.
"Medium to long term we expect CAD to gain ground against USD again as the market has priced in Fed rate hikes much more notably than for the BoC. The European Central Bank is likely to stay expansionary for some time to come after it extended its purchasing program until the end of 2017. Thus the CAD is likely to gain against the EUR in the long term", the report said.
