Substantial Downgrades to CAD Forecasts Announced at Deutsche Bank

Image © Pound Sterling Live 2015.

Currency analysts at Deutsche Bank have told clients they are pushing out their 2015, 2016 and 2017 forecasts for the Canadian dollar.

The downgrades are announced as Canadian GDP data was shown to have fallen at a faster-than-expected rate in November.

GDP (MoM) (Nov) declines by 0.2%, analysts had predicted a decline of -0.1% suggesting that the January interest rate hike at the Bank of Canada was a well informed decision.

Why is the Outlook for CAD Looking Softer?

A number of analysts have been wrong-footed by the speed of CAD’s decline at the start of 2015.

Deutsche Bank strategist Daniel Brehon says:

“We did not anticipate the Bank of Canada cut last week that took the entire market by surprise and sent USD/CAD two big figures higher.  

“The BoC took action after witnessing a 60% fall in crude prices that continues unabated despite growing evidence of a supply response (the US rig count has fallen near 20% over three months).”

Forecast models at the bank show that the value of the Canadian currency is indeed tied to the value of WTI oil prices.

The declines from 100 USD a barrel have however not been matched by the decline in CAD, until now, which tells us there is a lag effect.

Above: USD/CAD catches up to medium term fair value implied by oil prices and 2-year rate differentials.

With the US economy showing no signs of a slowdown there is ample reason for an interest rate hike to occur in 2015 confirming the divergent paths between the US and Canada.

The Bank of England should follow the US Fed in raising interest rates, something that will further underpin the GBP/CAD.

Indeed, latest forecasts for this pair see the rate exceeding 2.0 in 2015.

Brehon continues:

“In the medium term we feel it is too early to take profits on USD/CAD as monetary policy divergence should continue throughout the course of 2015.”

Altered Forecasts for 2015, 2016 and 2017

In 2014 Deutsche Bank’s forecast for the USD/CAD exchange rate was for a slow grind higher to 1.20 in 2015.

However, the rate of decline witnessed at the opening of the year has pushed back the targets:

• USD/CAD end-15 through end-17 forecasts pushed to 1.30, 1.35 and 1.40 respectively
• Looking ahead several years Deutsche believe USD/CAD will encounter resistance above 1.40 as BEER valuation overshoot enters the traditional 15-20% sell zone.
• Deutsche continue to like selling CAD against MXN and NOK as a relative value trade that isolates oil breakeven differentials and lowers the beta to short term oil price fluctuations