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11 23 2015 | by Victor Xing | Capital Markets

What are two main catalysts for USDCAD?

USDCAD and Canada’s dependence on energy-led growth

USDCAD is highly sensitive to crude oil prices, and given Canada’s energy dependence, falling oil prices would weaken Canada’s economy and cheapen the Canadian dollar (on expectations of BOC easing, as well as weaker fundamental growth).

USDCAD vs. WTI

Policy divergence

The other element to is policy-driven dollar strength.  There are several factors behind dollar’s appreciation, with the most important one being expectations on Federal Reserve policy tightening.  As expectations rise on a December rate hike, yields on 2 year Treasury notes have been on a steady rise.  The same catalyst also pushed USD stronger relative to CAD.

USDCAD vs. 2 year Treasury yield
2 year Treasury yield as a proxy for expectations of FED policy tightening

Next article11 23 2015 | by Victor Xing | Central Banks

Why won’t the Federal Reserve support debt monetization?