Canadian Dollar Forecast: Strength Ahead BUT the Pound Could Still Yet Break Above 2.0
The Canadian economy is strengthening and the outlook for the CAD has improved significantly, but the British pound still has the chance to advance a little further.
The Canadian dollar could be about to see a turn-around in fortunes after months of decline. Driving the recent strength in the Canadian dollar is a notable improvement in global commodity prices with oil in particular finding upside traction in recent days.
Royal Bank of Canada (RBC) have forecast an improvement in the longer-term picture for the Canadian dollar exchange rate complex as the economy slowly gains traction.
That said, those hoping for a stronger pound to Canadian dollar conversion should note that there remains further upside potential for the pound GBPCAD.
At the time of writing the exchange rate is at 1.98; the pair is predicted to rise to above 2.0 by the end of the year by RBC Capital.
However, gains will ultimately be kept in check by a rapidly improving Canadian economy suggesting that the sweet spot for those looking to buy Canadian dollars lies between now and the next 6 months.
Driving the pair higher will be moves higher in the headline USD to CAD exchange rate which is seen rising to 1.36 by the end of the year.
"Our forecast assumes that the Canadian dollar will weaken further in the absence of a sharp recovery in oil prices and given the divergence in Canada-US short-term interest rate spreads," says an exchange rate forecast note from RBC to clients.
Latest Pound / Canadian Dollar Exchange Rates
  | Live: 1.8602▲ 0%12 Month Best:1.8915 |
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| 1.7969 - 1.8044 |
**Independent Specialist | 1.8341 - 1.8416 Find out why this is a better rate |
* Bank rates according to latest IMTI data.
** RationalFX dealing desk quotation.
No Interest Rate Cut
Providing support to the Canadian dollar exchange rate complex (CAD) will be a Bank of Canada (BoC) intent on keeping interest rates steady.
It is assumed by RBC's foreign exchange analysts that the rebound in economic activity is locked in; they expect the BoC will be content to hold the overnight rate at 0.5% at its upcoming October meeting.
The continuation of positive economic growth and the core rate holding above the 2.0% target will be sufficient for the Bank to remain sidelined for most of 2016.
Exports Boost Growth
Canadian exports posted such strong gains in June and July that even assuming some modest payback in export growth in August and September, it is likely that exports will post a hefty 9% annualized third-quarter gain.
"The surge in exports should be paired with a mild rise in imports, pointing to net trade adding about 2 percentage points to annualized third-quarter GDP growth following a 0.6 percentage point contribution in the second quarter," say RBC.
Real GDP increased by 0.3% in July, building on June’s revised 0.4% gain and resulting in the level of GDP regaining almost all the losses recorded from January to May 2015.
The rise reflected another solid increase in the goods sector due to a sharp recovery in mining, oil, and gas production.
The emphasis will soon shift, it is argued by fellow Canadian bank TD Securities, from a focus on relative USD weakness for a need to see broader CAD strength.
US economic momentum has clearly softened in recent weeks, but Canadian activity remains fragile and we question whether it can remain immune to a slowing US economy.
USD v CAD Under Sustained Pressure
Near-term direction on global currency markets meanwhile favours the commodity currency complex with the NZD, CAD and AUD all making strong avances on improved global sentiment.
"The relentless downward pressure seen on USDCAD over the last several days has abated this morning as spot found some support around the 1.3065 mark. After several days of sharp declines, spot has narrowed the gap to our estimate of ‘fair value’, but with that now around 1.2810 some divergence still remains. Much of this is due, in our view, to the move in interest rate differentials between the US and Canada," says a note from Ned Rumpeltin at TD Securities in London.
These have narrowed substantially in Canada’s favor over the last several weeks as US yields have fallen while their Canadian counterparts have remained largely range-bound.
"Looking forward, we see the 1.3013 level as key support. With the latest resurgence in the CAD, however, we think the burden of proof is shifting to the Canadian leg of the trade to propel further declines from here," says Rumpeltin.
