The Canadian dollar “could be king”, according to the Bank of Montreal
“In a quiet FX market, we believe the CAD would be king” – BMO Capital.
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Bank of Montreal’s capital markets division says the Canadian dollar remains well positioned to gain against most major currencies.
In a recent quarterly update, BMO Capital Markets said it expects the Canadian dollar to remain supported by a combination of economic growth, monetary policy, fiscal policy, political stability and external balance fundamentals. .
In fact, on these metrics, the Canadian dollar is considered “the best of the G10”.
“In a quiet FX market, we think the CAD would be king,” says Greg Anderson, global head of FX strategy at BMO Capital Markets.
But financial markets are anything but calm at present given growing fears of a global recession as central banks rein in accommodative monetary policy by raising interest rates.
The Canadian dollar is often considered a base currency and a pro-cyclical currency, that is, a currency that tends to appreciate during global expansions and rising stock markets.
Therefore, the global context is not necessarily one in which the Canadian dollar could thrive.
The current decline in growth expectations and equity markets puts the safe-haven, ultra-liquid US dollar at the top of BMO Capital’s pick list.
“In the environment of a soaring US dollar this year, the CAD has to settle for being number 2 in the G10,” Anderson said.
However, when the broader USD stops rallying, BMO Capital Markets thinks the USD/CAD will reverse relatively sharply and the Canadian dollar’s gains on the crossovers will increase.
“We don’t think the BoC would hinder that adjustment,” Anderson said.
Above: USDCAD outlook versus the forward curve. Sources: BMO CM, Bloomberg.
Improving Canada’s international trade position is seen as an emerging fundamental driver of support for the Canadian dollar.
“Canada is now back to a small current account surplus,” says Anderson. “Energy exports to the United States have picked up as US energy production declines. High oil prices will also help as long as they remain high.”
BMO Capital notes that Canada ran consistent current account surpluses during the first part of this century, as the United States depleted the vehicles of oil and gas exporters and Canada.
But vehicle manufacturing then shifted to Mexico, and the United States increased its own energy production.
Above: Canada’s current account as a % of GDP is back in surplus. Sources: BMO CM, Bloomberg.
“High oil prices have brought base flows to the CAD and reversed its external balance. However, the resurgence in oil prices has not attracted foreign direct investment, nor will it, unless there’s a new breakthrough on a pipeline,” Anderson said.
BMP Capital forecasts a USD/CAD exchange rate of 1.28 in three months, 1.26 in six months and 1.24 in 12 months.
Their currency forecasts for the GBP/CAD exchange rate are around 1.51 over three months, around 1.54 over six months and around 1.51 over 12 months.
The exchange rate between the Canadian dollar and the Canadian dollar is currently quoted at 1.2960 and the exchange rate between the British pound and the Canadian dollar at 1.5905. (Set your exchange rate alert here).