Canadian Dollar Overbought warn CitiFX, Lloyds Foreacst More Gains, Swissquote Bearish Long-Term

Is the Canadian dollar overpriced at present levels or will recovering commodities, a firmer economy and positive momentum continue to drive CAD higher?

• Bank of Canada keep rates on hold but boost CAD with sanguine approach to recent strength
• Citi say Canada's currency is now overvalued v US dollar
• Lloyds expect Canadian Dollar to rise while Westpac favour the Aussie over Loonie
• Swissquote staying bearish on CAD longer-term

The Canadian dollar has roared into a position of dominance in 2016 with a supportive central bank and recovering commodity prices to thank.

But, the CAD’s strength could be overdone argue analysts at CitiFX who have recommended betting against the currency.

However, it is important to note a Canadian dollar correction lower is likely to be more pronounced in some currencies than it is in others.

“With the BoC presenting a calmer tone overnight, USDCAD dips sharply from a 1.3448 high to take out the 200d MA at 1.3307 and stabilise near rising trend line support at 1.3222,” say CitiFX.

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The move is also partly due to the consolidation in oil prices but as with the RBNZ, the BoC statement overnight, while relatively more upbeat, does not bar the door for further easing reckon Citi.

Notably, the BoC wants to see today’s jobs data (which has been softer in recent months) and the Federal budget before acting.

Economists are forecasting the Employment Change reading to rise to 9K, up from the previous month's decline of 5.7K. If this level is exceeded we could well see recent gains maintained. 

Having witnessed the strength of CAD's move over recent weeks we would say the impact of a disappointing reading will likey have a more pronounced impact.

Regardless, we see interest in buying the Canadian dollar likely to remain elevated provided supportive background conditions (oil prices) remain in place. 

CAD Forecast to Move Higher on Stabilising Sentiment and Domestic Growth

Analysts at Lloyds Bank expect the Canadian Dollar to continue appreciating in the longer-term as the price of oil recovers and the domestic economy shows further improvement.

“We envisage the risk outlook remaining stable and the rise in oil prices continuing, extending toward $55/barrel by year-end. Should these conditions materialise, CAD should strengthen further.”

Says the research note from Lloyds, which goes on to highlight the recovery in the domestic economy:

“In addition, the domestic outlook is also providing positive momentum, with recent GDP growth of 0.8% exceeding expectations of 0%.”

Against the U.S Dollar the loonie has performed especially well in 2016, with USD/CAD falling from a high of 1.4689 to lows of 1.3260.

This has been predominantly as a result of a lowering in expectation of the Federal Reserve hiking interest rates, which has weakened the dollar.

The Bank of Canada's reluctance to lower interest rates in January and March, however, was another important factor supporting the CAD side of the pair.

Lloyds see major risks to the currency coming from a period of, “sustained downward pressure on oil prices, as this has acted as a significant negative shock in recent months, and a prolonged period of “risk-off” trading – but we view both as unlikely. “

As far as their target goes they say:

“On balance, we anticipate moderate CAD strength, toward 1.30 through 2016.”

Westpac’s Callow, Less Optimistic

In a note analysing the AUD/CAD pair, Sean Callow at Westpac argues the Aussie is set to outperform the Canadian Dollar in 2016.

He thinks that Bank of Canada forecasts that growth will “pick up to above potential in Q2, 2016.” Will lead to disappointment, saying, “We believe they will again be disappointed.”

The continued low price of oil remains an obstacle to more sustained growth in Canada:

“The multi-week outlook for prices of key commodity exports is not very promising for either Australia or Canada but we suspect CAD is not pricing enough risk for Canada’s economy.”

Data from Futures Exchanges is showing that speculators are still sticking to their overall net bearish positions against the Canadian dollar, despite limited profit taking:

“Leveraged funds have covered CAD shorts from time to time but overall seem convinced that USD/CAD is heading higher.”

Swissquote Bearish Longer-term

Technical analysis from online lender Swissquote remain bearish the Canadian dollar in the long-term.

In an analysis of USD/CAD, they argue that the original break above 1.3065 was key in determining the long-term outlook:

“In the longer term, the break of the key resistance at 1.3065 (13/03/2009 high) has indicated increasing buying pressures, which favours further medium-term strengthening.”

They don’t see any strong resistance until the 1.49 highs, but see support at 1.2832, the October 2015 low.
In the shorter term, however, swissquote are more bearish:

“USD/CAD's momentum is bearish. Selling pressures are still important.”

Currently the pair is “bouncing back” a little too:

“Yet the pair is bouncing back from support at 1.3262 (year-low). Hourly resistance is given at 1.3377 (07/03/2016 high) while stronger resistance can be found at 1.3587 (29/02/2016 high).”

Overall, the pair is “Expected to show continued weakness.”

CAD Surges on Bank of Canada's Sit-Back-and-Watch Approach

The CAD surged over a full percent in the mid-week session on the back of the Bank of Canada's March policy decision and further advances in crude oil prices.

The Bank of Canada held its benchmark interest rate at the current 0.5%, they have also come out with a surprisingly hawkish tone which has propelled the CAD almost a percent and a half.

Many had expected Governor Poloz to take shot at the Canadian currency's new-found strength.

Instead, the Governor sounded rather sanguine about the recent strengthening in the exchange rate saying both the Canadian dollar and oil were averaging close to levels assumed in their Monetary Policy Report.

Indeed, further CAD strength was gifted to the bulls by developments in global energy markets mid-week with Brent crude establishing itself above the 40 USD a barrel marker.

US light crude is nearly 4% higher and about to break the 50 USD a barrel marker too.

The rally comes despite  inventories rising by 3.9M barrels, 0.9M barrels over the 3.0M forecasted by markets.

But gasoline inventories fell 4.5 million barrels, much more than the polled number of 1.4 million barrels.

"Gasoline is the star of the show today. Ongoing strength in demand has yielded a large draw to gasoline inventories despite a rebound in refinery runs," said Matt Smith at energy data specialists ClipperData.

The bottom line? Sentiment is improving fast in the commodity sector, this can only be a good thing for both the CAD, NZD, AUD and ZAR.

Poloz Boosts the CAD

The decision to keep interest rates unchanged came as no surprise after BofC Governor Stephen Poloz had said he wanted to wait until after the budget before modifying monetary policy.

The BOC pointed out in its accompanying statement that financial stability had improved:

“Financial market volatility, reflecting heightened concerns about economic momentum, appears to be abating. “

The bank further added it still expected global growth to continue rising in 2016, adding, “US expansion remains on track.”

It highlighted low oil prices as a drag:

“At the same time, the low level of oil prices will continue to dampen growth in Canada and other energy-producing countries.”