CAD: Further Evidence Of Breakdown In CAD-Oil Link; Where To Target?

The Canadian dollar belongs to the “commodity camp” due to its oil exports, but this is not the only factor moving the C$. The team at CIBC finds further evidence for a breakdown in the link between crude and CAD:

Here is their view, courtesy of eFXnews:

Further Evidence of Breakdown in CAD-Oil Link With the recovery in oil prices since the start of the month, it’s no surprise that the C$ has appreciated. However, the loonie’s flight hasn’t been as high as we would have assumed based on the move in WTI. Given traditional ties with oil, a roughly 2½% appreciation would have been expected—similar to the move seen in the similarly oil-driven NOK during the same period. However, the actual appreciation has only been around half of that. As discussed last week, this desensitization of CAD to the price of oil reflects the view that BoC monetary policy won’t be altered by movements in WTI within a certain range.

Changes in interest rate spreads from increases in US rates, as the Fed once again gets closer to a hike, will do most of the work in pushing the C$ weaker in the coming months.

CIBC targets USD/CAD at 1.32 by the end of Q3 and at 1.35 by the end of the year.