Rebound in energy prices unlikely to extend further support to CAD in medium term, says Scotiabank

The Canadian dollar (CAD) has benefited from a run of stronger-than-expected data in the early part of the year that possibly does not fully reflect some of the ongoing challenges in the composition of and momentum behind domestic growth.

Trade data has shown a return to surplus, but growth in non-energy exports remains weak (-4.4 percent y/y in real terms in January). Domestic businesses also appear concerned about potential challenges in trading with the US going forward, which may hamper the long-awaited strengthening in business investment in Canada.

With trade struggling and capital spending plans poised to remain weak, domestic consumer demand and housing will have to continue doing much of the heavy lifting on growth in the coming months. The poor composition of growth and excess capacity, is expected to keep domestic price pressures subdued, effectively rules out any Bank of Canada (BoC) rate increase through mid-2018 at least, Scotiabank reported.

Short-term rate differentials between the US and Canada are poised to remain adverse (for the CAD) for the foreseeable future. With crude oil softening amid signs that US shale producers are stepping up output, the prospect of a significant rebound in energy prices providing more support for the CAD in the near-to-medium term looks remote, the report added.