Key insights
- Goldman Sachs suggests the Canadian dollar's near-term performance is tied to energy market dynamics and dollar movements, despite softer Canadian economic data. The energy shock supports CAD, but medium-term USMCA uncertainty poses risks. A sustained recovery in risk sentiment and relaxed commodity markets could lead to CAD underperformance. Overall, a slightly bullish signal for risk-on assets, but the impact on US equities is limited.
Investing.com - The Canadian dollar has shown resilience among G10 currencies in recent weeks despite softer domestic economic data, according to Goldman Sachs.
March inflation data came in below expectations even with the energy shock, while the latest employment report showed stabilization but minimal improvement from a year ago. Goldman Sachs economists expect these conditions should allow the Bank of Canada to remain on hold at the April meeting.
The firm said fundamentally this leaves it less constructive on CAD (NYSE:CAD) in the medium term, particularly with USMCA uncertainty likely to weigh on the currency ahead of the July 1 deadline.
"As long as the terms of trade implications of the energy shock remain at the fore, Canada’s idiosyncratic domestic considerations should remain secondary FX drivers," analysts at the firm said.
In that environment, CAD should continue to outperform, consistent with its high sensitivity to oil-price shocks in Goldman Sachs’ GSTOT framework and its positive correlation with the broad dollar. The firm noted CAD’s dollar beta cuts both ways and poses the risk of underperformance in the case of a sustained recovery in risk sentiment and relaxation in commodity markets.
Goldman Sachs said despite medium-term concerns, the currency’s performance remains tied to energy market dynamics and dollar movements in the near term.
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