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CIBC: Canadian Dollar Forecast Update Confirms Devaluation Still Likely

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Cooling NAFTA risks will help support the Canadian currency says one of Canada's leading lenders.

The outlook for the Canadian Dollar is not as negative as previously thought, say Toronto-based CIBC Capital Markets, who have revised their forecasts for the currency higher as a result.

The main factor to have changed is that the risk of the US unilaterally walking away from the NAFTA free trade agreement is now not as great it was before.

That and the recent broad-based sell-off in the US Dollar have lightened their CAD forecast which still anticipates a decline in the currency from current levels.

"That quick USD plunge, and prospects that NAFTA talks will drag on rather than see the US abruptly pull out, have us projecting a bit less of a C$ depreciation ahead," says a note from the CIBC economics team.

CIBC Economist Royce Mendes now thinks the Bank of Canada (BOC) will raise interest rates only once, by 0.25%, to 1.50% in 2018, as NAFTA uncertainties - although more muted than before - weigh.

This is less than market expectations (see below).

The recent rise in the Canadian Dollar versus the US Dollar is also in itself likely to deter the BOC from raising interest rates because it has impacted negatively on exporters and will dampen inflation by making imports relatively cheaper.

"The recent Canadian Dollar move is in itself also a tightening in monetary conditions, one hitting exporters at a time when US tax and regulatory policies are causing the corporate sector to have second thoughts about expanding in Canada rather than in the US," says Mendes.

One thing which has supported the Canadian Dollar recently is higher oil prices, however, this is not likely to last.

With prices now above the breakeven rate for US shale oil producers they should crank up their production significantly and this will start to have a depressive effect on prices.

CIBC now forecast the US-to-Canadian Dollar exchange rate rising to a peak of 1.32 in Q3 before falling back down to 1.28 in 2019.

For the Pound-to-Canadian Dollar, they see a pretty much steady rise from the current 1.74 to 1.89 by Q2 2019.

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