Canadian Dollar: Goldman Sachs Staying Long

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Foreign exchange strategists at Goldman Sachs are sticking with the Canadian Dollar, expecting it to outperform most rivals over coming weeks.

In a weekly currency briefing Zach Pandl, co-head of Global Foreign Exchange Strategy at the Wall Street bank, says the Canadian Dollar is "still our preferred long candidate in G10."

Goldman Sachs economists have upgraded the number of interest rate hikes they expect from the Bank of Canada following last week's meeting, a move that underpins the CAD.

"The overall tone was hawkish, as the statement highlighted the risk of inflation expectations becoming unanchored and noted that the economy was moving into excess demand,” says Pandl.

The Bank of Canada raised interest rates by 50 basis points last week and signalled more hikes were coming, in a move analysts said should support the currency.

Governor Tiff Macklem expressed a desire to normalise policy and said the Bank might need to bring rates "modestly above neutral" to bring inflation back to target.

He said the Bank would be "forceful" in achieving its goals.

The market now anticipates another 175 basis points of hikes from the BoC in 2022, which should offer support for CAD against the currencies of those central banks that are likely to be slower in raising rates.

Following the BoC's communication Goldman Sachs economists upgraded their forecasts for the BoC’s policy path to include three additional 50bps hikes in June, July, and September.

The Canadian Dollar remains the second best performing G10 currency of 2022, with fellow commodity currency the Australian Dollar holding the top spot.

The Canadian Dollar rose through the late-February to late-April period, a time that coincided with the outbreak of war in Ukraine.

The associated surge in the cost of commodities boosted the terms of trade advantage of energy and commodity exporters such as Canada and Australia.

But the rally in the Canadian Dollar stalled in April.

Above: GBP/CAD at daily intervals (top) and USD/CAD (bottom), showing 2022 performance.

"While CAD has underperformed its beta to oil recently, we suspect that poor risk sentiment, related to global growth and US recession concerns, and high volatility in rates are likely taking precedence over the large commodity price moves, weighing on CAD among other pro-risk commodity-linked assets like AUD," says Pandl.

Nevertheless a renewal of those gains could be set to extend according to Goldman Sachs strategists.

"Despite CAD’s underwhelming price action over the past couple of months, we still have a preference for the currency among the G10, given that it’s among the best-placed in terms of macro conditions that would support tighter policy," says Pandl.

"We therefore stick with the Loonie as our preferred long in G10," he adds.