Canadian Dollar Outlook: Credit Suisse Stay Constructive

Image © Bank of Canada

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Foreign exchange analysts at Credit Suisse are backing a stronger Canadian Dollar in 2021 as they tell clients they are looking through the current rebound in Covid-19 infections and expect the Bank of Canada to continue 'tapering' its quantitative easing programme.

"We remain constructive on CAD," says Alvise Marino, a foreign exchange strategist at Credit Suisse in a recent research briefing note.

The risks to the economy and the currency posed by the resurgence of Covid-19 cases in Canada is tipped by Credit Suisse to be of little major consequence for an economy that is well positioned for a rebound.

Indeed, negative effects caused by new shutdowns are expected by researchers to be partially offset by the prospect of additional fiscal spending by the government.

Authorities in Canada on Tuesday announced the country saw in excess of 120K additional cases of Covid-19 since the Easter long weekend, nearly double the infections seen in the two weeks leading up to the holiday.

Above: Canadian covid-19 infections (black) and deaths (red). Image courtesy of NBF.

"The imposition of lockdown measures in Ontario on 8 April has catalysed the market’s attention on renewed strength in local Covid numbers," says Marino. "Against this backdrop, FX markets seem to be of the view that the rangebound price action that prevailed over the past month in USDCAD will persist".

On Monday, 8,316 new cases of Covid-19 were reported as a third wave of the pandemic gripped the country.

Analysts at Credit Suisse say they are for now not inclined to view the resurgence of Covid-19 cases as an existential issue for the Canadian Dollar, saying the so called "surge" in Covid-19 cases "appears in fact very tame in an international context".

"The lockdown measures previously imposed in Ontario were successful in driving a sharp reversal in growth of cases in January. The precedent argues against this latest episode leading to growth expectations being downgraded sharply," says Marino.

The rise in Covid-19 cases has nevertheless lead markets to suspect the Bank of Canada (BoC) - which meets on Wednesday - might strike a cautious tone on the outlook, which might put some downside pressure on the value of the Canadian Dollar.

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The BoC is expected by the analyst community to announce this week that it will maintain a policy of gradually reducing its quantitative easing programme, a process known as tapering.

The rule of thumb in foreign exchange markets is that tapering is associated with currency strength, particularly when one central bank tapers while others continue to expand their balance sheets.

The tapering of quantitative easing at the BoC is said by Credit Suisse to pose "positive implications for CAD".

The market consensus shows investors expect weekly purchases at the BoC to be cut from C$4BN to 3BN at this week's meeting.

But much uncertainty lies with how the BoC might respond to the third wave of Covid-19 infections, and this offers up the potential for volatility on the day.

Nevertheless Credit Suisse tell clients they see Covid-19 and lockdown-related risks to the growth outlook as limited for now and the issue as being unlikely to derail their constructive stance on the Canadian Dollar.

Credit Suisse are forecasting Canadian Dollar strength to push the USD/CAD exchange rate back down to 1.2260 on a three-month horizon.

At the time of writing the U.S. Dollar-to-Canadian Dollar exchange rate is quoted at 1.2524 while the Pound-to-Canadian Dollar exchange rate is quoted at 1.7509.