USD/CAD: Rising oil prices to provide tailwind for stronger loonie – MUFG

During February the Canadian dollar strengthened modestly against the US dollar from 1.2782 to 1.2696. Economists at MUFG Bank have adjusted the USD/CAD forecasts to show more front-loaded strength and expect the pair to trade at 1.23 by end-2021.

See: USD/CAD to nosedive to 1.24 by mid-year amid enthusiasm for commodities currencies – CIBC

Key quotes

“ The Canadian dollar has benefitted from the ongoing rebound in the price of crude oil which hit new post-pandemic highs in February. The rebound in the price of Western Canada Select has been particularly impressive as it has reached the highest level since September 2019. The favourable developments have prompted our oil analyst to raise his already bullish outlook for the price of oil.” 

“The Canadian dollar is deriving support from expectations that the Bank of Canada will continue to slow the pace of QE purchases. The BoC last slowed the pace of purchases in October to CAD4 billion per week from USD5 billion. A further slowdown in the pace of purchases could be warranted later in the year if the economic recovery proves stronger than expected but the BoC will be wary of encouraging an even stronger CAD.”

“Canada’s economy is expected to regain upward momentum following a softer start to this year as evident by renewed weakness in the labour market. The relatively slow pace of vaccine roll out in Canada poses some downside risk to recovery optimism, although new cases have still fallen sharply recently.”