CAD: Downside risks from oil and election uncertainty – MUFG

Derek Halpenny, Research Analyst at MUFG, suggests that when numerous factors combine together to point in the same direction, that’s a time to take note and CAD is facing the same situation at the moment.

Key Quotes

“The Canadian dollar did briefly gain on the back of the perceived TV debate victory for Hillary Clinton on Monday night but that risk is not going to go away and while Clinton may get a lift in the polls – it is a small number of state polls that matter. The Real Clear Politics website had the Electoral College count estimate, excluding the swing states, at 209 for Clinton versus 156 for Trump early last week. That count today is now 188 versus 165 with more states falling into the swing state category. So on that front the Canadian dollar remains vulnerable.

The oil scenario laid out above is of course another factor suggesting downside risks for the Canadian dollar while our nominal 2-year yield spread chart covering a four-year period suggests USD/CAD should be trading closer to 1.4000 rather than 1.3000. Given that the Bank of Canada at its last monetary policy meeting signalled increased downside risks to the inflation outlook and given that shift was justified by weaker inflation and retail sales data last Friday, there is clear scope for further CAD weakness over the short-term.”