CAD to USD: The No. 1 Reason to Be Bullish on the Canadian Dollar

CAD to USDMore Upside for the Canadian Dollar?

The CAD to USD exchange rate has shot up too fast and Société Générale advises investors to buy the loonie because more appreciation is expected. Royal Bank of Canada projects more recovery for the Canadian dollar as well.

The CAD to USD is nearing US$0.76 today, helped by a mix of a five-week-old oil rally and the outlook for monetary policy in Canada and the United States.

An analyst at Société Générale thinks the loonie has gone further than the rise in oil prices would suggest.

“This acceleration propelled the [Canadian dollar] to even outperform the rebound in Brent prices to $40.00 from the $27.00 low at end January, for the first time since the start of 2015,” Olivier Korbe said in a report. (Source: “Canadian dollar shoots toward 76¢. Buy it, Société Générale advises,The Globe and Mail, March 11, 2016.)

“However, there is no reason for the relationship between the [Canadian dollar] and oil to weaken,” he added.

The loonie has appreciated nearly 11% since its low of US$0.68 registered on January 20, but it is still 10% weaker than its 52-week high of US$0.83 it recorded on May 5.

One loonie buys US$0.75 on Monday.

Meanwhile, West Texas Intermediate (WTI) crude for April delivery has rebounded 30% since its February 11 low of $28.74, but it is still down 43% from its 52-week high of $65.71, recorded on May 6. The contract was trading at $37.37 on Monday.

On the other hand, gold has gained only one percent and silver has lost 0.8% over the past month, although both metals are still the best-performing investments in 2016.

RBC said its forecast “assumes there will be a supply-driven rebalancing in the oil market yielding a recovery in oil prices and commensurate improvements in the Canadian dollar.”

“Another factor at work on the currency is the divergence in monetary policy between Canada and the U.S. with the Federal Reserve committed to raising interest rates while the Bank of Canada is more likely to maintain the policy at 0.5 per cent for the remainder of the year,” RBC added.

The Bank of Canada kept its benchmark interest rate unchanged at 0.5%, as expected on Thursday. The Canadian central bank will wait and see what the federal government plans to spend on stimulating the economy in its forthcoming federal budget before taking any further action.

The U.S. Fed, meanwhile, kicks off its two-day policy meeting on Tuesday, which isn’t expected to result in an increase to benchmark interest rates when it releases its policy statement on Wednesday, but may offer clues about the central bank’s outlook for future monetary policy moves.

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