FXStreet (Delhi) – Research Team at Unicredit, suggests that the recent sharp depreciation of the CAD (in tandem with the whole of the commodity FX bloc) reflects the slump in energy (commodity) prices, which has compounded expectations of further monetary policy easing. Key Quotes “BoC communication has reduced the probability of the latter and should restrain further CAD weakness, barring another round of collapsing oil prices. It should also reignite CAD's outperformance vis a vis the core commodity currency complex, i.e. AUD and NZD. BoC governor Stephen Poloz said that a further sharp depreciation of the CAD would now pose a risk to the BoC’s inflation outlook. In our view, this illustrates that the central bank believes the exchange rate has done most of the heavy lifting to absorb the shocks and that now the balance of risk may be shifting, a point which we have also highlighted recently. We would make two remarks here: First, this kind of communication conveys the message that the BoC thinks that monetary policy may be approaching it limits. This is important, especially when compared to Australia and New Zealand, where the room to ease is bigger. Secondly, and although it is certainly not part of their mandate, we suspect that we will hear similar comments from other central banks that are currently operating near the zero interest level in economies where the mix of growth and inflation remains pretty weak. The Bank of Japan could be a case in point. Overall, we expect high volatility to continue rippling through the commodity FX complex in the short term. The recent havoc in markets has created strong momentum, which could push asset values way beyond fundamentals for an extended period of time; it is very difficult to forecast when this will end. But fundamentally, the world is a better place than currently reflected by risk premiums. Most of the shocks in emerging markets are likely behind us. In that respect, we still expect stabilization, followed by some appreciation in commodity currencies later in the year, and believe the CAD stands to outperform.” For more information, read our latest forex news.