Olivier Korber, Research Analyst at Societe Generale, notes that the CAD seemingly outperformed the oil rally but the global picture including US rates shows that this fast appreciation isn’t a correlation break. Key Quotes “Indeed, cross asset delayed price action suggests that the CAD might in reality be lagging oil. We remain bullish of oil-sensitive currencies and meanwhile, the Bank of Canada status quo signalled that monetary policy won’t prevent the strengthening of the CAD. CAD outperforming oil: no correlation break The USD/CAD is seeing its eighth consecutive week of decline. This acceleration propelled the CAD to even outperform the rebound in Brent prices to $40 from the $27 low at end January, for the first time since the start of 2015. However, there is no reason for the relationship between the CAD and oil to weaken. In adding the US rates factor to get the full picture, the USD/CAD is consistent with its short-term fair value. Interestingly, the 10yT yield is not strongly correlated to oil, so the two factors are complementary to explain the FX rate moves. Therefore, the fast appreciation of the CAD is unlikely to be a correlation break. As we have already seen in the past, the nature of the relationship between oil prices and the FX level can shift, but the currency will remain driven by the developments in the commodity complex. Although there may be some respite in the coming days, CAD upside over the next few weeks is certainly not over. As we highlight in our FX Daily, oil is holding up while equities and commodities are weaker. Our oil strategists assume a bullish path for 2016, so we stick to oil-sensitive currencies (CAD, NOK, RUB) relative to China-sensitive ones (our preferred short is the NZD – our NZD/CAD short spot recommendation hits our target). Unlike the RBNZ, the BoC did not surprise the market since it refrained from cutting rates in an unexpected way, leaving the target rate at 50bp. Although Canadian inflation is running lower, the CPI at 2.0% remains more elevated than what we observe in most developed countries. At this stage, monetary policy will not at all depress the ongoing appreciation of the CAD, while the break could happen as soon as next week if the Fed proves sufficiently dovish on the back of a toppish 10yT yield. Technical causality: The causality from commodity to FX coupled with the technical picture brings some insight about the future price action. The USD/CAD is just testing the 1.3250 support met on the ascending trend started in summer 2014. Conversely, Brent prices are limited by a similar descending trend which started at the same time. However, it turns out that oil already broke its $37 resistance while the USD/CAD is still above its support. While the CAD outperformed oil with respect to their relationship since the start of 2015, the delayed price action suggests that it might in reality be lagging it.” For more information, read our latest forex news.