Canadian Dollar Exchange Rate Forecast 2014: CAD Strength Will Wane Warns Scotiabank
- Written by: Rob Samson
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The second week of June has started well for CAD thanks to good housing stats, but gains should be limited according to the updated 2014 exchange rate outlook issued by Scotiabank.
The week has thus far gone the way of the CAD with consolidation being seen in the mid-week session:
- The British pound to Canadian dollar exchange rate is 0.03 pct lower on last night's close at 1.8278.
- The euro to Canadian dollar exchange rate is 0.10 pct lower at 1.4760.
- The US dollar to Canadian dollar exchange rate is 0.02 pct lower at 1.0902.
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Canadian Dollar forecast to retain a side-ways trend
As of late the CAD has been supported by the powerful combination of a US recovery, oil above US$100 and the already sustained weakness in the currency.
"Even as the fundamental outlook has improved it remains unbalanced, a situation that could be aggravated by a stronger CAD. Accordingly we do not expect a material and sustainable shift outside of this range within our forecast period," says Camilla Sutton at Scotiabank.
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The US economy is recovering, but after a difficult first quarter, GDP is expected to reach only 2.4% in 2014.
"However from Canada’s perspective this is still strong enough to provide support for oil prices as well as the domestic oil export market; but
likely not strong enough to offset the risk of the unbalanced economic backdrop. The longer term FX fundamentals, like the current account deficit, combined with PPP valuation warn of downside risks to the CAD. However, the near-term fundamentals have improved," says Sutton.
The Bank of Canada is thus left with a fine balancing act where it will need to acknowledge the improved outlook — noting inflation moving back to target — "but not sound so optimistic as to drive CAD strength," suggests Sutton.
The correlation between the CAD and WTI oil prices has been relatively weak in 2014; however the Canadian energy backdrop is actually quite positive for the domestic fundamentals.
WTI above US$100 (we forecast it to average between $98 and $100 in 2014), combined with a year-to-date narrowing in the underlying oil pricing spreads, is supportive of the Canadian energy sector as well as the terms of trade.
While sideways action is ultimately expected, Sutton does forecast a negative slant for CAD:
"Flows into Canada have trended lower and will likely be challenged in June due to large sovereign and provincial coupon payments; however the broader trend is one where Canada is seen as an attractive home for capital, but demand is not as large as it was during the financial crisis. By the end of May, the investor community had cut its short CAD position in half, but continued to cling to a near-term bearish outlook.
"We see the CAD backdrop as uneven and mixed, which is likely to keep the currency somewhat range bound. We hold a Q214 CADUSD target of 0.91 (1.10 in USDCAD) and a year-end forecast of 0.89 (1.12)."
Weekend economic snapshot
Britain £70 billion better off - thanks to bombs and boffins: Britain’s economy is up to £70 billion bigger than previously thought, according to revised official estimates to be published this week.
Shell starts search for new Chairman: Royal Dutch Shell has begun to search for a new Chairman as Jorma Ollila prepares to step down after eight years at the oil giant.
E-cigarette pioneers smoked out by American rival in £62 million deal: Two entrepreneurs behind a leading electronic cigarette brand have agreed to sell the business to an American rival for $104 million (£62 million).
William Hill lines up insider to replace Topping: Britain’s biggest bookmaker is set to promote one of its senior managers to succeed Ralph Topping as Chief Executive.
London opens the door to Airbnb property rental boom: Ministers will slash decades-old red tape that has blocked Londoners from letting out their properties on websites such as America’s Airbnb and British rival OneFineStay.
Barclays faces £300 million claim over Qatar ‘fees’: Barclays is to be hit with a £300 million high court lawsuit from Amanda Staveley, the dealmaker who helped the bank secure a financial lifeline from a consortium of Middle Eastern investors six years ago.
