Jane Foley, Research Analyst at Rabobank, suggests that the CAD has this week rallied to its best level vs. the USD since July 2015 and the recent gains in the oil price have been a big incentive for the CAD. Key Quotes “Incorporated within the firmer tone of oil is a spark of optimism with respect to the outlook for the Chinese economy. Also supporting the CAD has been a string of better than expected domestic economic data. While the firmer tone of the Canadian economy can be expected to be recognised by the BoC in today’s publication of the Monetary Policy Report, it is equally likely that Governor Poloz will highlight the ongoing risks to growth. Canada’s March labour market report brought news of a four times greater than expected 40.6K rise which the majority of these jobs being full time. This report sits comfortably with the recent better tone of consumer confidence (which was boosted in the wake of the March budget) and with the stronger than expected Q1 GDP report, which at 0.6% q/q was twice the size of the consensus forecast. The combined impact of these strong data releases has been to pare back remaining speculation that the BoC could be poised to cut rates again. However, the BoC is likely to remain wary about potential headwinds. At its March policy meeting the BoC warned that “financial vulnerabilities continue to edge higher, in part due to regional shifts in activity associated with the structural adjustment underway in Canada’s economy”. Similar concerns were referred to by the IMF yesterday when it stated that “commodity-exporting advanced economies continue to adjust to reduced income and resource-related investment. While the IMF cut its forecast for Canadian growth to 1.5% in 2016 from 1.7% in its January report, it was not all bad news. The IMF also stated that for Canada “the drag from the energy sector was offset partially by a more competitive currency and an expected increase in public investment”. It is these factors that have thrown a life-line to various parts of the Canadian economy. According to a recent report from the Conference Board of Canada, the production of production of passenger cars and light trucks is up nearly 50% since 2011. That said, while strong auto sales in the US have been supportive, Canada’s auto plants remains vulnerable to cheaper wages in Mexico and the CAD/MXN exchange rate which has returned to levels last seen in 2012. Pharmaceuticals, aerospace, food processing and furniture making are other Canadian production sectors which are reported to be doing well in part due to the softer tone of the CAD vs. the USD. While the US is, by a huge margin, the largest trading partner of Canada, China is now the second most important. According to a speech in early April by BoC Senior Deputy Governor Wilkins “Canada face opportunities and risks as China undergoes a complex transition to a more sustainable pace of economic growth”. Given that China is the world’s largest consumer of commodities, the price of oil will continue to provide a tangible reference to the impact of Chinese growth on Canada. Despite this year’s recovery in the oil prices, huge inventories combined with risk of further bad news regarding the Chinese economy later this year suggest that upside momentum could run out of steam. This factor combined with the risk that the BoC will retain a cautious outlook on policy suggest that there is still risk that USD/CAD will pop back above the 1.30 level later this year.” For more information, read our latest forex news.