FX Markets Best Banks Awards 2020: Best bank for USD/CAD – Bank of Montreal

The Covid‑19 pandemic caused a spike in trading volumes, weakening USD/CAD in early 2020. While many expected this uncertainty to suppress CAD, it rebounded faster than expected and has strengthened over the past year

The performance of the Canadian dollar during the Covid-19 pandemic has been exceptional. The currency was extremely resilient throughout last year’s bout of volatility that rocked currency markets. Canada’s currency did not suffer the type of dislocations experienced elsewhere in the market and is now on much stronger footing against the USD than it was pre-pandemic.

“USD/CAD was volatile in 2020 but, given everything that happened in financial markets, it was shockingly liquid and extremely well behaved,” says Gregory Anderson, global head of FX strategy at Bank of Montreal. “Liquidity providers stepped up and continued to make markets and prices in an extremely difficult environment. Faced with apocalyptic distress, financial market participants rallied around the flag for the good of the global economy.”

The volatility of 2020 caught many unaware since FX traders had somewhat fallen asleep on USD/CAD in 2019 after such a tight range and the lowest volatility of the 21st century, says Anderson. 

The onset of the pandemic and the subsequent plunge of the West Texas Intermediate oil forward contract below zero dollars caused a spike in trading volumes and a weakening in USD/CAD in March and April 2020. And, while many in the market expected the lingering uncertainty to suppress the Canadian dollar for an extended period of time, the ‘loonie’ rebounded rather quickly and has strengthened dramatically over the past year.

Bank of Montreal, which clients voted the best bank for USD/CAD in the 2020 FX Markets Best Banks Awards, expects the Canadian dollar to remain bid against the greenback throughout 2021 and even more so against the euro and euro-linked currencies.

Anderson and Bank of Montreal also expect the Canadian economy to rebound quickly as the country managed the pandemic comparatively well and the economy didn’t suffer as much as many major trading partners.

“Canada’s economic recovery will probably lead those of most other Organisation for Economic Co-operation and Development economies,” says Anderson. “Economic data in the second half of 2020 was promising, and early 2021 data is even better, which likely signals how the recovery will proceed throughout the balance of 2021. The economy experienced a shallower trough and will be back to full output quicker than most. Through a conservative management of the economy, the government gave itself a ton of fiscal space, which it has used during the pandemic as a shock absorber to growth.”

The Canadian economy was given additional breathing room by the Bank of Canada’s (BOC’s) quantitative easing (QE) measures but, while the BOC would prefer to exit its QE programme within the same timeline as the US Federal Reserve to avoid triggering further CAD strength, it will find this to be a tricky endeavour. The country’s economy is expected to recover before its peers, which will pressure the central bank to end QE earlier than others. It may also have little choice given the limited volume of government bonds available to purchase.      

“The Bank of Canada has a challenge the Fed doesn’t have, and that’s a much smaller bond market,” says Anderson. “Canada ran a fiscal surplus for several years and therefore there is a limited supply of bonds to buy. The bank may be forced to taper QE sooner than the Fed, the European Central Bank and the Bank of Japan because there is nothing left to buy.

“The Bank of Canada would prefer to exit more or less at the same time as other central banks – particularly the Fed – to minimise the chance of a disturbance in the USD/CAD exchange rate.”

While the remarkable rally in oil prices over the past few months could further add to CAD strength, Anderson expects the major oil producers to boost supply to keep prices in check and avoid a resurgence of the North American oil complex. 

“It’s conceivable that oil prices could go into the $70s, but probably not last for any duration,” he says. “As soon we get to these levels, producers in Organization of the Petroleum Exporting Countries nations will step up and increase supply. It’s not in Saudi Arabia or Russia’s long-term interests for the price to be so profitable for US and Canadian producers that they are able to fully rebuild.” 

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