CIBC: GBP/CAD Exchange Rate has Further to Fall According to Latest Forecasts

"Any negative impact on the CAD from the ongoing retreat in oil and broader commodity prices has been offset by the Bank of Canada's frontloaded hiking cycle, highlighted by the supersized 100bp rate hike in July" - CIBC.

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The Canadian Dollar remains this year's second best performing major currency and is tipped to maintain that outperformance over coming weeks, but by year-end it should start retreating against the Euro and Pound.

This is according to a new monthly foreign exchange forecast and briefing note from Canada's CIBC.

The lender's capital markets division says it expects the Canadian Dollar to remain under pressure against the U.S. Dollar over coming weeks and into 2023, confirming it is too soon to call an end to USD dominance.

But, Canada's close links to its southern neighbour offers it the potential to outperform other currencies, such as the Euro and British Pound near-term.

"The CAD continues to follow the pack in moves against the broad USD, which has eased off lately as risk appetite has improved. Any negative impact on the CAD from the ongoing retreat in oil and broader commodity prices has been offset by the Bank of Canada's frontloaded hiking cycle, highlighted by the supersized 100bp rate hike in July," say economists Katherine Judge and Avery Shenfeld at CIBC Capital Markets.

The Canadian Dollar is recording a loss of 1.57% for 2022 against the U.S. Dollar at the time of writing, but it holds a gain of 9.60% against the Pound and 10.00% against the Euro.

The Canadian Dollar is anticipated by Judge and Sheffield to remain pressured against the U.S. Dollar if the Bank of Canada delivers a 75bp hike at its next meeting, "that won't be bullish for the loonie if the market sees that as the end of the Bank's tightening cycle," the authors say.

The BoC surprised currency markets by going with a 100bp hike in July, raising the bar for other central banks when approaching surging inflation.

The risk for the Canadian Dollar is a future reduction in the size of rate hikes impacts on the Canadian Dollar, particularly against the U.S. Dollar which is in turn supported by the Federal Reserve's aggressive approach.

"With inflation higher in the U.S., the Fed will likely have to take the upper bound of the fed funds range up a quarter point above the Bank's terminal overnight rate, at 3.50%," say Judge and Shenfield.

But even a reduction in rate hike sizes to 75bp will likely mean the Bank of Canada remains further ahead of the Bank of England and European Central Banks.

This would likely support the Canadian Dollar against the Euro and Pound going forward.

However, a turn lower against Sterling and the Euro comes amidst expectations by CIBC's economists for a widening in Canada's travel services trade deficit, a cooler path for commodities and a cooling in Canada's housing market.

CIBC Capital's forecast for the Pound to Canadian Dollar exchange rate shows 1.50 for the end of the third quarter of 2022, 1.53 for the end of the year with a recovery extending into the new year taking it to 1.60 by the end of the first quarter and 1.61 by the end of the second quarter. (Set your FX rate alert here).

CIBC Capital's forecasts for the U.S. Dollar-Canadian Dollar exchange rate are 1.29, 1.31, 1.33 and 1.33 for the above points.

For the Euro-Canadian Dollar exchange rate the relevant forecasts are 1.28, 1.31, 1.37 and 1.40.