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CAD: Renewed oil drop leaves CAD vulnerable - MUFG

FXStreet (Delhi) – Derek Halpenny, European Head of GMR at MUFG, suggests that the oil price’s break below USD 40 pbl has left the Canadian dollar vulnerable to further downside from here.

Key Quotes

“Our short-term USD/CAD model has traded very tightly with spot over the last 12mths but has opened up a gap now with our model indicating a potential move to 1.3750. The market had become comfortable with the views that crude oil would settle and bottom at around USD 40 and that the BOC would not have to ease policy further. With the first view now wrong, the markets are wondering about the second.”

“Governor Poloz spoke yesterday in a speech in Toronto and generally remained upbeat, highlighting the fact that for Canada global growth is hugely important and hence the drop in crude oil prices would ultimately be positive for global growth, which would help Canada.”

“However, while he argued that no further easing will be required, he did add that a negative interest rate was part of the Bank of Canada’s “unconventional toolkit” that could be used in a major economic crisis. Governor Poloz also stated that it would not go below -0.50% and hence with the official rate currently at 0.50%, the BOC has 100bps of monetary easing to play with. This is important given back in 2009, the BOC’s stated that the official rate would not be cut below 0.25%. So the scope for rate cuts has opened up considerably.”

“This may well be Governor Poloz trying to shape expectations in the event of a continued drop in crude oil prices. A move closer to USD 30 pbl on crude oil may well be enough to encourage more action by the BOC. We lowered our Canadian dollar view given the increased risks to falling oil prices and our revised target for USD/CAD of 1.4000 now looks very achievable in the first half of next year. Governor Poloz yesterday also emphasised the importance of a weak Canadian dollar.”

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