Canadian Dollar Outlook Deteriorates on Oil Price Concerns, Buy Dips in USD / CAD Forecast TD Securities

The Canadian Dollar (CAD) has come under sustained pressure on a combination of falling oil prices and poor US data and forecasts suggest further losses remain possible.

We had warned earlier in the month that the Canadian dollar would likely soon recouple with oil price movements; this prediction has now come to pass.  

"CAD buyers are enjoying the lowest currency costs in five years thanks to heightened worries about the shape of the world economy. The fearful market backdrop has seen oil collapse to four-year lows around $80 a barrel, a negative for resource-driven currencies like Canada’s," notes Joe Manimbo at Western Union.

On Friday morning we are seeing global markets steady and commodity-focused currencies like the CAD are correcting higher:

• The pound to Canadian dollar exchange rate (GBP/CAD) is 0.09 pct lower at 1.8095.
• The euro to Canadian dollar exchange rate (EUR/CAD) is 0.52 pct lower at 1.4350.
• The US dollar to Canadian dollar rate (USD/CAD) is 0.10 pct lower at 1.1248.

Note: The above quotes are taken from the wholesale markets, your bank will affix a spread to the rate at their own discretion. By actively seeking out a better rate with an independent FX provider you could get closer to the market and save up to 5% more FX in the process. Please find out how.

Oil Prices Soften Canadian Dollar Outlook

USD/CAD extend gains to the fresh 5-year high of 1.1375 due to concerns on falling oil prices.

"Oil prices are now at alarming levels, as the oil industry will get a serious hit below the $85-profitability-threshold for some oil sand projects, according to International Energy Agency. If this is the case, lower prices can only hit Canada’s most important export business and thus impact the already fragile Canadian recovery," says Ipek Ozkardeskaya at Swissquote Research.

With investors casting nervous glances at global growth and policy implications, weaker crude oil is another cause to doubt that the BoC will be quick to follow any, eventual tightening in Fed policy in 2015.  

Commenting on the outlook for the Canadian dollar, Bank of Canada and oil is Shaun Osborne at TD Securities:

"Speaking at the weekend, Governor Poloz stressed that policy at home will be set with the domestic economy in mind, rather than matching Fed policy moves.   

"Sustained weakness in crude oil prices will curb investment in the domestic oil patch—adding a further headwinds to the rebound in business investment that the BoC feels is a key determinant of returning the Canadian economy to full capacity.  

"By our own reckoning, sub-$80/bbl crude prices will have a more obvious impact on the  viability of some higher cost, marginal producers and sustained losses below here are liable to accentuate pressure on the CAD to some degree."

The CAD Gets Hit by USD Advances

Meanwile, TD Securities confirm they over-estimated the CAD’s ability to resist the broader onslaught of the USD and the move to new cycle highs above the March peak strongly suggests that the overall rally in USDCAD is getting back on track—sooner than analysts had expected.  

Commenting further, Osborne says:

"We had recently tried to short USDCAD, in anticipation of a moderation and correction in the USD rally running into year end.  That may yet occur, but any correction in the next few weeks seems likely to be shallower and shorter in duration than we had assumed.

"Minor dips in USDCAD will look attractive for buyers moving forward, assuming that the gains in USDCAD are sustained through the close of the week to give a little more validity to the extension higher in USDCAD which has taken the market to the highest levels since mid-2009."