TD Securities analysts expect the Canadian Dollar (CAD) to show relative resilience versus non-USD peers thanks to Oil links, lower beta to risk-off and cleaner positioning. However, they still anticipate USD strength and see USD/CAD moving higher as geopolitical uncertainty and risk premia stay elevated, with BoC communication not a major driver.

CAD resilience but USD/CAD upside risk

"As the conflict approaches its third week, CAD has continued to demonstrate relative resilience. With a more dovish assessment of recent data flow balanced by hawkish risks posed by higher energy prices, we expect BoC to strike a cautious tone and keep all options on the table but fall short of signaling any imminent action. This is not going to be a big driver for USD/CAD with a focus on geopolitical uncertainty."

"Overall, we see USD upside while risk and uncertainty premia remain elevated and expect USD/CAD to move higher on further risk-off. In our playbook, we outline market reactions under the following scenarios:"

"Modest escalation scenario: We expect limits to escalation on both sides of the conflict, particularly given the US midterm election year. Under this outcome, USD downside will eventually return on waning US growth exceptionalism, diminished safe-haven appeal, and the persistence of the “Hedge America” theme which may intensify after recent US actions."

"Protracted conflict scenario: If the conflict proves more prolonged, CAD should outperform its non-USD peers. It has lower beta to risk-off, oil links and terms of trade boost (even though modest), and is less exposed to any growth slowdown on the other side of the world from an extended conflict (as it is mainly exposed to the US). However, USD/CAD will move higher on a more prolonged risk-off."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)