What's Next For The Canadian Dollar ?

The Canadian dollar is at a critical point right now, as illustrated in the CAD index chart below. The CAD is trading on the lower support of an upwards rising channel structure, and although the CAD has gained momentum from April onward, it is looking increasingly weak. Note that previously when the index would touch the lower support trend line, there would tend to be a noticeable push higher, we are not quite getting that same reaction looking at index prices from July onward.

What are some of the factors to be aware of?

1 – Oil Prices
Around 10% of Canadian GDP is directly derived from Oil activity, the concern here is that Oil prices have fallen steeply to the point where refineries and Oil companies are not making profitable margins when taking into account the upstream, midstream and downstream processes. After rebounding to $40 bbl, WTI crude oil has slipped back below, the $40 is considered an important level which below this, the market is said to be bearish and vice versa for oil prices above $40 a barrel. Traders should watch current prices closely, demand concerns could trigger a larger correction south to which the CAD will be vulnerable to.
2- US Dollar
A major contributor which has seen CAD prices gain this year , has been considerable weakness in the US dollar triggered by significant quantitative easing measures initiated and deployed by the FED. It is expected that this weakness will continue , looking at recent data, there has been a few cracks emerging in the US employment growth sector. Recent data has swayed away from the growth trend we have witnessed over the previous months and this may be early signs of a stalling recovery. Should US job data deviate further from the trend this upcoming week, the dollar could be prone for further downside as the FED will be pressured to provide support stimulus.
3- Inflation Targets
The Bank of Canada set a 2% inflation target last Wednesday providing a Hawkish tone on the economy. Should this target be kept the same, it would mean the BOC will be tightening at a rate faster than the FED which could see appreciation in the CAD, quantitative easing can be used to keep the loonie in check if it becomes too strong.
4- Election Risk
U.S. elections might come as a surprise on this list but there is a risk specifically for USD/CAD exchange rates in the event Biden emerges victorious in the elections this year. In order for the Canadian Economy to benefit from Oil business activity, Oil prices must remain at attractive levels, Biden has put this at risk by threatening to remove permits for the Keystone XL oil pipeline , as part of a greater green energy initiative.

“We’re about to go into some pretty substantial conversations as a country here with the consultation on how Canada should design its pathways to get to net neutrality by 2050,”  – Turcotte

It will therefore be interesting to see if Biden follows through with this threat, should he do so, Oil spreads will tighten and this will make the actual business of refining and selling oil less profitable, potentially weighing on CAD strength.