US Dollar Forecast to Recover Against Canadian Dollar, Loonie to Exit March "As a Lamb"
The Canadian dollar has delivered an impressive performance over recent weeks but one of Canada's leading research houses is not convinced the move can last much longer.
- BMO Capital keep their three month forecast for the USD to CAD exchange rate at 1.45.
- Lloyds, by contrast forecast more CAD strength
CAD has been the standout performer in G10 FX over the last eight weeks, rallying almost 9% against the USD.
The rally higher has however been briefly checked by softer Chinese trade data out on the 8th of March, nevertheless, the Canadian dollar retains a strong position in G10 FX having pushed the USD to CAD exchange rate to 3 month lows.
The currency has benefited from a recovery in investor risk appetite, the bullish price action in oil, the paring of US rate expectations and an improving domestic picture.
Oil prices rose nearly 6% at the start of the week with WTI crude climbing to its strongest level year to date.
"In addition to oil, the price of gold, silver, copper and iron ore also extended higher, paving the way for gains in the Canadian and Australian dollars,” notes Kathy Lien, analyst at BK Asset Management, "but the gains in these currencies should have been stronger given the magnitude of the increase in commodity prices.”
This is an interesting observation, should CAD not be even higher?
Indeed, in the wake of impressive Canadian dollar gains of late it is possibly now time to look at betting on the trend turning.
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Analysts at BMO Capital believe March could end on a soft tone for the Loonie. BMO releader their latest USDCAD Monthly publication entitled, “The loonie enters like a lion but could exit like a lamb.”
The title should hint at how lead analyst Stephen Anderson is thinking.
"After such a strong February, that followed a large outperformance of EUR, AUD, GBP and MXN in January, CAD probably can’t continue to rally at the lion-like pace we’ve seen in the first few days of March," says Anderson.
CAD gained 3.2% against the USD and 2.9% on a trade-weighted basis in February.
Against the pound the Canadian currency has been particularly bolshy forcing the GBP to CAD exchange rate from a 2016 high at 2.0925 to a 2016 low 1.8674.
CAD to Settle Down in March
Options market are hinting the move is due a cooling off period. as they are now pricing in a consolidation which looks to extend to at least the end of March.
"Downward movement in USDCAD may continue a bit longer and/or further in the first half of the month, but eventually it should run out of energy," says Anderson.
Another reason to expect calmer market conditions, at least through mid March, is the BoC and Fed meetings.
“Even though we and markets don’t expect anything from the two central bank communiqués, markets typically dial back on positions when they get within a few days of rate decisions,” says Anderson.
Volatility is possible coming out of the policy announcements, but this doesn’t seem like the right juncture for either central bank to change its message.
“We see a greater chance of the BoC surprising markets, by striking a more dovish tone than markets expect, than the Fed, by striking a more hawkish tone than expected,” says Gallo.
BMO economists still have a June Fed rate hike and an April BoC rate cut in their forecasts.
They have said that those calls are tenuous for those precise dates, but confidence is high that the Fed will hike at least once and the BoC will cut once in 2016.
Neither is fully priced in.
Oil Prices Still the Big Unknown
With oil being the most watched correlated factor at present, the proposed meeting of OPEC and Russian oil ministers looms large.
The meeting is rumoured for March 20, although nothing has been solidified and Iran still doesn’t seem to be interested in freezing its output.
“Rumours and hopes alone have caused oil markets to ignore a continuing rise in US crude inventories, but if output freeze hopes are dashed, USDCAD should return to the upper 1.30s,” says Gallo.
BMO Capital have put their 1M USD to CAD forecast at 1.37.
That is 2.5% higher than where we are, but it’s still below February’s average.
"We are keeping our 3M outlook at 1.45. We admit that looks like a stretch right now, but we expect markets to be fully pricing in an imminent Fed hike at that stage and we expect the BoC to have already hiked, or for a July hike to be priced in," says Gallo.
Analysts still think summer will be the peak for the broader USD, so they have forecast USDCAD fading lower over the 6-12 month horizon.
"Given our outlook, our preferred trading strategy for March would be to build a long USDCAD position below 1.3400 with a stop loss around 1.3250. We would look to take partial profit on the long above 1.3800 and full profit around 1.4100," says Gallo.
