Analysts at MUFG Bank, point out the higher price of crude oil should encourage a stronger Canadian dollar. They see the USD/CAD trading at 1.2200 by the end of the third quarter and at 1.2000 by the fourth quarter. 

Key Quotes:

“The Canadian dollar strengthened in March along with AUD, NOK and NZD with the consistency being the obvious commodities linkage. These four currencies outperformed the US dollar while the rest of G10 depreciated. Mineral fuels, precious metals – mainly gold, timber, minerals and aluminium made up 5 of Canada’s top 10 exports, accounting for nearly 40% of exports.”

“USD/CAD was held back from steeper falls by the move in the US-CA spread in favour of the US dollar – the spread jumped by 18bps in March given the scale of shift in expectations for rate hikes by the Fed. Given Canada’s linkage to the US, moves in the 2yr spread tends to have a greater influence.”

“The hawkish Fed and expectations of a 50bp hike on 4th May likely means the BoC will hike by 50bps on 13th April. BoC vs Fed direction via the 2yr spread will remain the key driver of CAD direction and while crude oil volatility will at times influence CAD direction, the price action to date this year suggests oil developments will be secondary to spreads.” 

This article was originally published by Fxstreet.com.Read the original article here.

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