Canadian Dollar Declines Forecast by Barclays, Citi, BofA and UBS

In a new note to clients Barclays say they are forecasting falls in the Canadian dollar (CAD) in coming months.

Indeed, the recent strength seen in the US to Canadian dollar exchange rate (USDCAD) should present investors an opportunity to gear up for a resumption of the upward trend in the pair.

The call by Barclays also chimes with similar views at other major research houses that includes Citigroup and UBS.

And as we reported recently, Bank of America have advised clients that they are forecasting a weaker CAD profile in 2015

Also advocating for declines in the Canadian currency are Citigroup and UBS who have suggested clients gear up for downside.

CAD Powers Higher

At the time of writing the Canadian currency is powering ahead.

The pound to Canadian dollar exchange rate (GBP/CAD) is quoted as being 0.35 pct lower on the wholesale markets at 1.9238.

However, an aggregated quote that represents the typical bank offer is seen at 1.8484.

The best independent offer we are currently being quoted is 1 GBP = 1.9103 CAD.

Looking at the USD to CAD, 1.2414 is the market rate - this is a sharp 0.6% lower than seen at last night’s close. Banks are seen coming in at 1.1927 with independents seen tighter on spreads at 1.2327.

Why the CAD Forecast has Been Lowered at Barclays

Essentially, the Bank of Canada has not done enough to stimulate the economy.

In January the currency slumped in response to a surprise cut to 3/4’s of a percent in the overnight rate.

However, “We see significant unpriced risks of additional, much needed, stimulus from the BoC,” warns Aroop Chatterjee in a note to clients.

With central bank policy remaining key to global exchange rate market movements it is thus confirmed by the analyst that the ultimate direction to be taken in CAD rests with the central bank.

And it would seem markets are starting to discount any further action by Governor Poloz and his team.

That would be a mistake suggests Chatterjee, “We believe the recent retracement in rate cut expectations is an opportunity to buy USDCAD.”

Lower oil prices will reduce investment and weigh on consumption as aggregate income and wealth falls due to the negative terms of trade shock.

Furthermore, Barclays think that the recent decline in CAD and the BoC’s January rate cut are not enough to offset these negative growth dynamics.

Without additional monetary easing, BoC estimates suggest growth could undershoot its baseline by 1.4pp over the next two years.

“However, its official growth forecasts are only 0.2pp lower over the same period. We see this as indicating its intention to cut rates to offset the disappointment, and estimate that at least 50bp of cuts will be needed over the next 3-6 months, significantly more than priced,” says Chatterjee.

As such, Barclays recommend being long USDCAD spot (ref: 1.2460, target: 1.3050, stop: 1.2210).

The Citi and UBS Forecasts

As mentioned, strategists at Citi and UBS are also warning on declines in the CAD.

CitiFX Strategy suggest clients go long USDCAD at 1.2546 with a target of 1.2800 and a stop at 1.2400.

UBS says:

“USDCAD was rangebound in choppy trading last week, vulnerable to the moves in oil. The focus this week should shift back towards fundamentals with BoC’s Poloz scheduled to speak tomorrow and the inflation data due on Thursday.

“The pair remains a buy on dips – starting ahead of the uptrend line around 1.2450 and down to 1.2310 – with stops through 1.2250. The downtrend line is around 1.2600, a break of which will expose 1.28, the Jan. 30 high.”