Intesa Sanpaolo have told clients they have lowered their estimates for the Canadian Dollar over a three, six and twelve month timeframe.
- Pound to Canadian Dollar exchange rate (27-10-16): 1.6334
- US Dollar to Canadian Dollar exchange rate: 1.3368
The Bank of Canada is looking to come to the table with more stimuls as per their the communications of their October 19th policy meeting.
The Canadian Dollar has been extremely weak ever since, particularly against the US Dollar and analysts are expecting further declines.
“As unanimously expected, at its meeting of 19 October the Bank of Canada left rates unchanged at 0.50%. However, Governor Poloz made the surprise announcement that the Governing Council actively discussed the possibility of adding more monetary stimulus at this time," says Intesa Sanpaolo’s Chief Economist, Luco Mezzomo.
The Bank of Canada also revised lower their growth projections by 0.2% for both 2016 and 2017.
It had already revised down inflation expectations at the September meeting in a possible warning to markets that more stimulus might be in the pipeline.
“The revision of growth forecasts was mostly prompted by weaker export growth and slower near-term housing resale activity,” said Mezzomo.
The BoC have made mortgage borrowing more difficult by introducing lending rules (also called macroprudential rules) in order to cool the overheating housing market.
If anything, this would be expected to increase the possibility of a rate cut going forward by insulating the housing market from lower borrowing rates.
The Bank of Canada noted a combination of lower interest rates and more stringent macroprudential policy would likely work to reduce both financial stability risks and the risk of an undershoot of inflation at the same time.
The question now is how much lower can the CAD be expected to go?
Mezzomo and his team have advised clients they have revised lower their forecasts for the Canadian Dollar over the coming 1-3 months.
The potential divergence in monetary policy trajectories of the BoC and the Fed are on of the key reasons behind Intesa’s downgrade.
“We have revised down our forecasts for the Canadian Dollar, in the near term in particular, to USD/CAD 1.33-1.35 on a 1m-3m horizon, as this is the period in which downside pressures should prove stronger, given the possible divergence between the Fed, which will hike rates and the BoC, which by contrast could consider cutting them,” says Intesa’s Mezzomo.
On the other hand, Mezzomo confirms his team's expectations for a gradual recovery in the course of next year, towards USD/CAD 1.25 on a 12m horizon.
Technical Studies Supports Bullish Forecast for USD/CAD
From a technical perspective, Forex Broker Hantec’s Market Analyst Richard Perry says current market action is suggestive of a move higher to the 1.37 on the horizon.
“Although a two-day closing breakout just failed on a dip into the close last night, the bulls are still fighting hard to hold on to the improvement. This move to a new high dating back to March effectively completes a base pattern that would imply a move towards 1.3740 in the coming months.”
Hantec’s Perry advocates waiting for pullbacks to the 1.3250-1.3300 support region for opportunities to buy.
Outlook for the Pound Against the Canadian Dollar
The Pound to Canadian Dollar pair is recovering from the flash crash lows due to CAD losses from the BOC’s dovish statement and a strengthening Pound due to hopes parliament will have more say in ‘softening’ the government’s Brexit stance.
Nevertheless, Scotiabank’s FX Strategist, Shaun Osborne, still sees risks as tilted to the downside:
“The absence of a stronger rebound—along with the still deeply entrenched bear trend reflected in the alignment of the daily, weekly and monthly DMI signals, suggest to us that GBP gains are liable to remain limited from here.”
Osborne sees selling interest increasing in the 1.62-3 region, in fact, and so there is a possibility the mini-up-trend could stall at the current level.