"We Have Slashed our Forecast for CAD Appreciation": Desjardins

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Desjardins slashes CAD appreciation forecasts as oil windfalls bypass Canada's economy.

CAD has not benefited from higher oil prices, say analysts at the Canadian lender.

New forecasts from Desjardins Bank say the Canadian dollar will be held back by restrained domestic growth, although it can still net some handsome gains against a sinking pound.

The calls are part of Desjardin's April FX update, which contains some notable forecast updates for the Canadian dollar and the pound.

Regarding Canada, one important takeaway is that the CAD has not benefited from higher oil prices, and restrained domestic growth should maintain pressure in the coming weeks and months.

"We expect that Canada's soft housing and labour markets, together with lingering business uncertainty, will continue to limit the pass-through from energy prices to core inflation," says Desjardins.

"As a result, the Bank of Canada should be able to remain on the sidelines for the rest of this year."

Interest rate direction will be an important driver of currency markets in the coming quarters; currencies tend to rise when their central bank is hiking interest rates.

This puts the Canadian dollar on the back foot against currencies belonging to central banks that are lifting interest rates.

Regarding oil prices, the Canadian dollar has often been decribed as an oil currency that benefits when prices rise.

View the consensus GBP/CAD forecasts from tier-1 investment banks for the coming quarters in our just-released Q2 forecast survey, now available from our partners at Horizon Currency.

Given this, the spike in oil prices caused by the Middle East war would have been expected to drive CAD outperformance.

"Higher oil prices have not benefited the loonie much," says Desjardins. "Canadian oil companies like Cenovus and Tamarack Valley have been very explicit that the windfall from higher oil prices will mostly go back to shareholders via buybacks, not into materially higher capex. Many of these shareholders are not Canadians and would expect to be paid in USD."

Analysts explain that a smaller share of oil revenues returning to Canada means the terms of trade gains will have a limited impact on overall employment and GDP.

Another concern will be U.S. trade relations as the USMCA agreement is due for renewal mid-year.

A concern for Desjardins is that any new deal will be back up for renegotiation in a few years, based on U.S. Trade Envoy Jamieson Greer's recent comments, creating a rolling and long-term source of uncertainty.

For the currency, this uncertainty won't be helpful.

"We have slashed our forecast for CAD appreciation," says Desjardins.

The Canadian lender now sees USD/CAD at 1.35 by the end of 2026 and 1.30 by the end of 2027, up from 1.34 and 1.28 previously.

However, a warning for pound sterling sellers looking to buy Canadian dollars: the notion that the CAD will underperform does not apply to sterling.

In fact, Desjardins are devout British pound bears, expecting GBP/CAD at 1.77 by midyear and then 1.76 by year-end.

If this GBP weakness does come to pass, those with CAD purchase requirements should seriously consider locking in current rates.

Elsewhere, EUR/CAD is seen to be a more stable play, with 1.59 seen at mid-year and year-end, which is in line with current levels of spot.