Canadian dollar (CAD) Not Yet a Safe Bet Warns Barclays Forecaster

By Rob Samson

The Canadian Dollar is forecasted to lose further ground in 2014 say Barclays, noting the risks are skewed in favour of the US dollar.

The US dollar to Canadian dollar exchange rate is suffering yet more falls on Friday the 28th of March.

The broader CAD complex is in fact enjoying a period of strength in sympathy with the NZD and AUD. An under-performing USD is also aiding the unit higher.

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However, analyst Aroop Chatterjee at has however confirmed today that he is forecasting the CAD to weaken in 2014.

He says:

• Slower growth, low inflation and higher unemployment has translated into a dovish monetary policy bias at the Bank of Canada since the January meeting.
• With the correlation of the Canadian and US business cycles at multi-decade lows, the BoC is likely to strengthen its dovish bias as US rates start rising. The CAD needs to weaken by roughly 5% to offset the nearly 50bp rates back-up implied by our US rates forecast.
• Additional negatives for Canada include its lack of competitiveness. The energy boom and the ensuing demand for labour have pushed up industrial sector wages, as might be expected in a classic case of “Dutch disease.”  A direct comparison of labour costs in the manufacturing sector shows that these are about 18% higher in Canada than in the US.
• The movement in relative terms of trade is likely to become less favourable for the CAD versus the USD. This is being driven in part by limited scope for higher prices in the near term (headwinds include a stronger USD, weak China demand, expansion of non-OPEC supply and long investor positions), reduced dependence on foreign oil in the US (as it develops its own unconventional crude oil sources further) and a less attractive Canadian oil sector versus the US. The latter two represent structural negatives for the CAD, in our view.
• The Canadian housing market has also been of concern to investors. Prices are up 129% on a nominal basis and 87% on a real basis since 2000. Although financial stability risks cannot be dismissed, a spike in delinquency rates is unlikely (unless the economy weakens significantly). However, we would expect a more circumspect BoC when rates do rise and housing market activity slows.
• We expect USDCAD to trade at 1.13 in 3m and 1.16 in 12m, with upside risks.