Canadian Dollar: Strong US Dollar and oil outlook weigh – Commerzbank

Commerzbank’s Michael Pfister notes that recent Canadian labour data and a new US-Canada bridge agreement are not the main drivers of USD/CAD above 1.41. Instead, he attributes the move to expectations around Oil prices and a strong US Dollar, arguing that a sustained decline in USD/CAD likely requires repricing Fed hikes or better US-Canada relations, including a possible United States-Mexico-Canada Agreement (USMCA) extension.

Fed pricing and USMCA seen key

"Canada released its labour market figures for June on Friday. These were marginally better than expected: almost twice the forecast number of jobs were created, at 18,200. Over the weekend, this was followed by reports that the US and Canada had agreed to open a new bridge."

"At that time, the Canadian labour market was experiencing stable and solid job growth, and relations with the US were also strong. Over the past year or so, however, both have done a complete U-turn."

"But the fact that USD/CAD is now trading above 1.41 again is probably less attributable to these two developments. It is rather due to market expectations regarding developments linked to the oil price and a strong US dollar, both of which have driven the exchange rate upwards."

"One can hope that a renewed escalation in the Iran conflict will drive up the oil price and thereby strengthen the CAD. But a sustained downward movement is more likely to require either the pricing out of expectations of Fed interest rate hikes, or an improvement in relations with the US - ideally, an extension of the USMCA agreement."

"Lower USD/CAD levels are unlikely to materialize until then."