Canadian Dollar Overpriced vs Pound and USD Warns Latest Analysis from Danske Bank

The Canadian dollar (CAD) will continue to benefit from an improving US economy; however we hear of warnings that the outlook against the US dollar and British pound could be undermined should oil prices fail to rally.

Oil prices are at worrying levels for Canada as this important oil industry will get a serious hit below the $85-profitability-threshold for some oil sand projects, says the International Energy Agency.

"If this is the case, lower prices can only hit Canada’s most important export business and thus impact the already fragile Canadian recovery," warns Ipek Ozkardeskaya at Swissquote Research.

In this article we hear in further detail what the future holds for the CAD from Danske Bank who have issued their latest currency forecast piece. First, the currency markets are showing that the currency retains a positive bias in the near-term:

• The pound to Canadian dollar exchange rate (GBP to CAD) = 0.27 pct lower at 1.7970.
• The US dollar to Canadian dollar exchange rate (USD to CAD) = 0.28 pct lower at 1.1139.
• The euro to Canadian dollar exchange rate (EUR to CAD) = 0.11 pct lower at 1.4209.

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Canadian Dollar is Expensive, But Will Correct Lower

Turning to the CAD's outlook, we hear from Danske Bank who see the CAD being expensive by PPP measures. (Price Parity - ie. relative buying power of the Canadian dollar to other currencies. The assumption is that exchange rates will ultimately revert to ensure the buying power of two currencies is equal).  

However, the believe that corrective declines will likely be realised on the lower oil price.

Commenting, analyst Stanislava Pravdová-Nielsen, at Danske Bank, says:

"The economic recovery seems to be losing some of its momentum as the fall in oil prices is starting to hurt the economy despite a solid exports performance. The GDP outlook has just been revised slightly down and, according to consensus, GDP growth should not exceed 2.3% in 2014.

"The current decline in oil prices represents the main downside risk to economic growth. Inflation is slightly above the inflation target of 2%, precisely at 2.1% y/y. It should fall back below the 2% in the coming months."

Danske expect oil prices to stay at low levels for the remainder of 2014 and this could weigh on the CAD. However, as oil production in Canada is rising, oil-related revenues will remain decent.

Meanwhile, The Bank of Canada (BoC) has maintained its overnight lending rate at 1.00% since September 2010 and it also stayed on hold at September’s meeting.

The BoC maintains its neutral stance, with the risk to inflation balanced.

"We expect the BoC to stay on hold at least until mid-2015 and hike interest rates in H2 15. However, a first rate hike could be pushed more into the future if the economy fails to recover due to a continued fall in oil prices," says Pravdová-Nielsen.

The risk to the cad is that oil prices continue to fall; this would have a negative impact on Canadian economy.

"As such, the risks to our USD/CAD forecasts are clearly on the upside," says Pravdová-Nielsen.

Nevertheless, Canada stands to benefit from a US recovery, which we see materialising further next year.

Near-Term: CAD in Sideways Trading Action

The near-term forecast for CAD does not offer much excitment; the curreny is something of a sidewhow at the moment.

"The CAD is something of a sideshow for the markets still as funds continues to carve out a well-defined trading range between firm support around 1.12 and corporate and other interest to sell nearer 1.13," says Osborne.  

Given the focus on developments outside of Canada this week and a distinct lack of market-moving domestic data ahead of Friday’s industry-level GDP for August, the CAD is likely to remain something of an afterthought for the markets.  

About the most exciting thing for Canada in the early part of the week may be the Toronto mayoral election (today).