Canadian Dollar Exchange Rate Forecast 2015: CAD Could Fall at Hands of USD Rally (But Beware the Extreme Scenarios)

The 2015 exchange rate forecasts for the US dollar to Canadian dollar exchange rate from the Canadian bank shows that USD/CAD will rally back to 1.09 on a 3M horizon and then reach 1.10 over a 6M period.

However, looking through to 2015, "we expect USDCAD to take off in 2015 and reach 1.17 in 1Y as the market prices in a Fed hike in July," say BMO Capital.

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Extreme scenarios: A deeper Canadian dollar slump or a rally

In the forecast note BMO Capital note two extreme scenarios where their base CAD predictions are proven wrong.

The first extreme scenario is where the Fed hikes early in 2015 which could raise the USD/CAD above 1.20 early next year.

"The extreme scenario lower in USD/CAD is a bit harder to fathom but would probably be the result of a middle east war driving oil to $150 and causing the Fed to extend QE3 in to 2015," say BMO which could see the CAD stage a sharp rally.

Canadian dollar steady at present

For now, we see the CAD maintaining recent ranges against a host of currencies after this past week's Bank of Canada event went by without event.

The bank's governor, Stephen Poloz, sounded neutral on the outlook, playing down a recent rise in inflation but playing up worry about risks facing the economy.

Commenting on the impact to currency markets Eric Theoret at Scotiabank says:

"USDCAD has risen modestly from Wednesday, with a consolidation around 1.0750 as market participants consider the off-setting impact of an explicitly neutral Bank of Canada, an improved US outlook, a two-day rally in oil prices, and the dampening impact of geo-political developments. In terms of CAD drivers, near term correlations continue to highlight an overwhelming impact from oil prices, as relative monetary policy (2Y US-CA spread) remains disconnected.

"Wednesday’s Bank of Canada events (discussed below) have weighed on policy expectations, lowering domestic interest rates while narrowing the US-CA 2Y spread to its lowest level since late 2011— a level that would typically be associated with much higher levels in USDCAD."

Currency market roundup

URUSD continued to trade in the low 1.35’s, the pair spent the whole of yesterday’s trading session bouncing between the high of 1.3540 and the low of 1.3510. The pair continue to trade around these levels this morning, with strong support lying at 1.3514 and 1.3502 respectively.

Eurozone inflation data released yesterday met expectations on both the headline and core figure of 0.5% and 0.8% respectively. The figure continues to remain in what the ECB have called their “danger zone” the ECB have stated that price growth of less than 1% risks deflation within the zone.

US unemployment claims posted better than expected data beating forecasts of 310k to post a figure of 302k. In addition the number of people continuing to receive jobless benefits dropped by 79k to 2.51m the fewest since 2007.

Fed member James Bullard stated yesterday if the economy continues to grow around its current pace, the central bank may have to raise short-term interest rates "sooner rather than later."

The Fed "is closer to its macroeconomic targets today than it has been most of the time since 1960," Mr. Bullard said. "Stronger-than-expected data, rising inflation and rapidly improving labor markets may change" the Fed's rate outlook "in the months and quarters ahead," he said.

Russia reacted angrily on Thursday to a new round of U.S. sanctions imposed over the Ukraine conflict, saying the penalties would also hit Western interests and warning it could retaliate.

The ruble reached its lowest point against the U.S. dollar since May 8 as the U.S. announced a new round of sanctions against Russia and a Malaysian Airlines jet crashed in Ukraine. The dollar bought 35.161 rubles yesterday, the most since the 35.168 rubles it bought on May 8, the day pro-Russian separatists in Ukraine ignored Vladimir Putin's call to postpone a secession vote, a sign the country was moving closer toward civil war.