Canadian Dollar Forecast: USD/CAD Price Hangs on Reflationary Market Sentiment

2021-02-27 08:00:00 Thomas Westwater

Canadian Dollar Fundamental Forecast: Bullish

Canadian Dollar on track to gain against the Greenback for February
Reflationary-driven market sentiment has helped underpin CAD prices
Oil prices and global economic outlook are vital to USD/CAD prices

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The oil-linked Canadian Dollar is benefiting from the global reflation theme sweeping through markets as it pushes oil prices higher on investor hopes for a strong post-Covid economy. USD/CAD is down nearly 1.50% month-to-date and prices may continue to drop if the current sentiment fueling markets continues. Investors are positioning themselves to take advantage of economic growth as the outlook clears. Oil is one proxy to do that through.

That said, the Canadian economy’s close link to oil prices has it in a prime position to ride the coattails of a reflationary-driven market. Risks remain to a strong economic recovery, however. For one, central banks could tighten sooner than expected, although that appears to be an unlikely course of action at the current time, with Federal Reserve Chair Jerome Powell stating that policy will remain accommodative for some time.

USD/CAD vs Crude Oil Daily Price Chart

Chart created with TradingView

Another major risk to prices would likely be a surprise resurgence in Covid-19 infections across major economies. While that remains unlikely with vaccination distribution efforts already well underway, a mutation to the virus, that renders current vaccines ineffective, could see governments tighten social distancing measures. That would dent travel and tourism which would likely pull oil prices down, and with it, the energy-linked Loonie.

Currently, however, infection rates are dropping throughout major global economies and emerging markets are seeing improved figures as well. According to WorldOmeter, global daily deaths were recorded at 10,855 for February 24, down from 17,613 on January 20. If the current trend continues, economies will continue to open up and that will likely underpin CAD strength. Thus, the global recovery and its impact on oil may drive Canadian Dollar sentiment and traders should remain keenly focused on global macroeconomic headlines – one way of doing so is with the DailyFX Economic Calendar.