National Bank of Canada (NBC) say the CAD should weaken as the economy remains fundamentally challenged while oil prices should remain capped.
The predictions from NBC come as the dollar and pound both look to put a line under recent weakness against the Canadian unit.
The pound to Canadian dollar exchange rate (GBPCAD) has been sent lower against the Canadian currency since August but, technically, appears to have formed a base at 1.98 in October.
The US dollar to Canadian dollar exchange are (USDCAD) is meanwhile seeing the majority of its losses loaded into October. The same base formation is not seen in USDCAD as seen in the GBPCAD.
Has the Canadian Dollar Had its Fun?
According to the latest Forex strategy note from NBC’s Financial Markets Unit there are a list of reasons to be wary on the Canadian dollar’s prospects going forward:
- The ongoing oil shock
- A benign Bank of Canada
- Prospect of a minority government being formed in the federal elections
Foreign investors remain skeptical about Canadian economic prospects for good reasons.
“There are still huge uncertainties with regards to the impacts of the oil shock not only in the present but also on the future outlook, e.g. via the observed collapse of investment spending,” say Stéfane Marion at NBC.
With the Bank of Canada likely to err on the side of caution, expect relative yields to be unfavourable to the C$.
Adding to the Canadian dollar’s woes are downside risks to the energy sector in light of further USD strength, the Iranian nuclear deal, and a weak global economy, all of which are negative for oil prices.
While the USD rally has certainly be halted we, and the majority of institutional forecasters we hear from, believe the rally will ultimately restart.
“Further uncertainty comes courtesy of this month’s federal elections which, according to latest polls, may deliver a minority government. Expect C$ weakness to persist for a while,” says Marion.
NBC are forecast the USD/CAD exchange rate at 1.34 in early 2016, rising to 1.36 by the middle of the year and 1.37 by year-end 2017.
Oil Prices Outlook: No Support for the Canadian Currency
The commodity price complex, and Oil prices in particular, remain a key driver of Canadian dollar performance.
Therefore predictions on future oil price movements are central to the Canadian dollar story over coming months.
"Oil prices likely to stay capped. We continue to expect oil prices to remain under pressure in the short term amid persistence of excess supply. In our view, any rebound is likely to be capped at USD 60/bbl-USD 65/bbl," say Standard Chartered in their latest economic forecast note.
Standard Chartered believe fundamentals, both from a demand and supply perspective, continue to favour a further fall in prices.
"On the supply side, while oil inventories in the US have fallen from their peak levels, these remain considerably elevated relative to history. Similarly, non-OPEC and OPEC oil production still do not show any signs of slowing meaningfully. In our view, this adjustment towards more normal levels of supply remains a multi-year process," says the UK-based bank.
Meanwhile, on the demand side, the global growth picture remains precarious.
The structural slowdown in EMs, which had been key to new oil demand creation, is likely to persist.
In the Developed Markets (DM), a pickup in growth has also been rather lacklustre, while risks of a further slowdown remain.