CAD Outlook

Commodity currencies have had a very poor quarter. A combination of weaker commodity prices, financial market volatility and idiosyncratic issues combined to weigh heavily on the performance of the AUD (-9%), NOK, (-7.25%), CAD (-7%) and NZD (-6%) versus the USD through Q3. 

USDCAD's steady appreciation trend extended to an 11-year high in late September and no end seen to this move in sight. USDCAD is expected to reach 1.37 by the end of the year. Supply/demand dynamics remain a constraint on a significant rebound in energy prices in the near-to-medium term. The terms of trade shock that the Canadian economy has experienced as a result of the oil price drop is still reverberating and domestic growth is expected to lag the NAFTA peers this year and next. 

The Bank of Canada is expected to keep monetary policy on hold. The September policy meeting statement gave no hint that further accommodation was being considered and markets have moved to price out much of the probability of a rate ease (roughly 20% of a 25bps ease priced in) over the next 12 months. The Bank of Canada appears happy to allow the CAD to do the heavy-lifting to help the economy adjust to weaker crude oil prices and narrow Canada's competitive gap. Tighter Fed monetary policy, which underpins USD strength at the expense of the CAD, will help keep Bank of Canada policymakers sidelined in the coming months. 

The looming election may not have that much impact on the CAD, at least from a positive perspective. Federal elections and their outcomes rarely alter the inertia of the CAD's underlying trend, up or down. The 42nd Canadian general election may be little different. A status quo outcome will not impede further CAD weakness while a result that produces a period of political uncertainty is liable to only contribute to the soft trend.