Canadian Dollar Outperformance Can Continue

USMCA signing ceremony, 2018. Official White House Photo by Shealah Craighead.

The Canadian Dollar can continue to outperform its main rivals say analysts.

CAD is now the third best performing G10 currency when screened over the past month, with the lion's share of strength following the election of Donald Trump and the Republican 'red sweep' of congress.

"CAD outperformance on the crosses. We expect this playbook can continue so long as trade policy is concentrated in other regions (Europe, China)," says analyst Meera Chandan at JP Morgan.

She explains that the Canadian currency has benefitted from political developments in the USA as Canada is seen as being less at risk of a 'hawkish' trade policy by the new administration.

It was Trump who oversaw the USMCA trade agreement that tied trade policy between the three North American nations, and he has yet to show any desire to rip it up.

At the very minimum, USMCA is a low priority. Canada's main exports to the U.S. are basic commodities, notably energy, which will probably be exempt from new tariffs.

This means more risk premiums will be required on non-CAD currencies.

Valentin Marinov, head of FX research and strategy at Crédot Agricole, says the Canadian Dollar has been the G10 currency that has coped best with this month's USD push.

"Perhaps because Canada seems better sheltered than other developed economies to an eventual rise in tariffs from the new US administration, while at the same time being a potentially greater indirect
beneficiary of any US fiscal boost thanks to Canada’s closer ties to the US cycle," he explains.

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JP Morgan's Chandan says Canada may also derive some positive spillover from policy-induced firmer growth from the US.

Noah Buffam at Canada's CIBC says CAD is outperforming on the crosses amid the USD rally.

Although the Canadian Dollar is expected to maintain strength against its major peers, the U.S. Dollar is still king.

"USD/CAD has now sustainably broken the 1.4000 level, which opens the way for a test of 1.4100. This is the first time in over 2 decades that we have breached 1.4000 without a sustained period of risk-off, which highlights the divergence priced between the BoC and Fed, alongside the upside risks to USD/CAD that a Trump presidency implies," says Buffam.

CIBC is looking for further USD/CAD upside towards the 1.41 level in the medium term as Trump’s tariff plans are better understood and given that it sees the Bank of Canada easing to the bottom end of their neutral estimate in 2025.