New Canadian Dollar Outlook Note from Scotiabank Warns of Losses into Year-End

The Canadian Dollar is forecast to reach its weakest point against the US dollar towards the end of 2015.

From this low the CAD is predicted to slowly strengthen through 2016 - this is according to the mid-year currency forecast note issued by Scotiabank.

While the longer-term outlook does not favour the Canadian currency it is worth pointing out that the shorter-term picture is certainly brighter after a solid employment report issued on the 5th of June.

The Canadian economy added 58.9 thousand more jobs in May, economists and markets had priced the Canadian dollar lower for a reading at 10 thousand. The positive surprise echoes a similar strong report from the US where nonn-farm payrolls smashed expectations. The US dollar and Canadian dollar were currency market out-performers on the back of the data setting up the two currencies for a stronger short-term outlook.

Those who see a link between the two economies will be picking up on a theme that will prove important for the Canadian dollar’s outlook for the remainder of 2015 and 2016. A strengthening US economy will aid Canada and provide support for the CAD against many other global currencies.

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According to analysts at Scotiabank, who have released their June currency forecast note, the CAD will start becoming less responsive to oil prices and more reliant on US economic performance.

“Oil price movement will remain a key risk for CAD; however, its significance appears to be fading with the Bank of Canada’s (BoC) shift in focus toward the U.S. recovery. The BoC’s noted domestic resilience is another mitigating factor, and the broader stabilisation in oil prices has curtailed the risk of a re-test toward the 2015 lows,” says Scotiabank’s Eric Theoret.

Canadian dollar outlook June to end of 2015The BoC’s specific recognition of the Canadian dollar’s movement is also important, hinting to sensitivity as it considers progress in the expected ‘natural sequence’ of export-led growth and potentially serving as a restraint for CAD in periods of strength.

“We view interest rate differentials as an increasingly significant driver for CAD, with a particular focus on the U.S. component given the expected stability for Canada,” says Theoret.

However, the BoC’s reassertion of its neutral bias has provided a stark contrast to the hawkish Fed tone conveyed by its key members, whose drive toward policy normalisation has remained steadfast with soft U.S. Q1 growth deemed to have been largely due to transitory factors. Canada’s anticipated growth profile is a weight for CAD, given expectations for underperformance relative to the U.S.

As such Scotiabank forecast the USD-CAD to rise towards 1.26 by the end of the year. Looking at 2016 it is believed that direction will switch with the CAD gaining the upper hand, the USD-CAD is seen at 1.24 by the end of 2014.

The euro v Canadian dollar rate is meanwhile expected to fall to 1.32 by year-end while 2016 offers more of the same – the exchange rate is expected to end the year at 1.24.