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According to National Bank of Canada’s analysts any positive developments on the trade wars front have potential to give a double boost to the Canadian dollar via an oil price rebound and more favorable yield differentials with the US.

Key Quotes:

“The BoC is concerned about the negative impact of the U.S.-China trade war which is “weighing more heavily on global economic momentum” than it had projected last July. As such, developments on the trade front (e.g. next month’s meeting between American and Chinese trade negotiators) will be crucial in determining what the BoC does next.”

“If, as we expect, there are positive developments on the trade front, the outlook for the global economy and oil prices would improve, negating the need for the Bank of Canada to cut rates. The loonie would then get a double boost, i.e. from yields and oil. As such, we are leaving unchanged our end-of-year target of 1.30 for USDCAD. But as we’ve seen this year, the Canadian dollar’s move towards that target is unlikely to be linear.”

“Since Canada is running a current account deficit, it remains dependent on foreign capital which can be volatile and hence impact the loonie’s value. Volatility can be significant considering capital flowing into Canada is largely made up of portfolio investment and deposits which are short-term in nature and can reverse on a whim.”