Canadian Forecast Dollar to Slide in 2024 as Bank of Canada Outcuts: National Bank of Canada

Image © Adobe Stock

The Canadian Dollar's recent run of strength is not built on a strong economic bedrock and a dovish tilt from the Bank of Canada will put the currency under pressure during 2024.

This is according to National Bank of Canada, where analysts say incoming data and soft oil prices will limit any further strength in the domestic currency.

To be sure, the Canadian Dollar has appreciated broadly during November and December, with USD/CAD falling from 1.39 to 1.35 now.

GBPCAD has fallen from 1.7275 in late November to 1.7090 now.

Surprising analysts at National Bank is that CAD's appreciation has come against a backdrop of falling oil prices.

"This should have weakened the currency, not strengthened it," says Stéfane Marion, an economist at National Bank of Canada.

"We would attribute much of the recent volatility in the Canadian dollar to speculative activity," he adds.

Track CAD with your own custom rate alerts. Set Up Here.

He cites data showing non-commercial traders had built up the largest negative positions against the CAD in more than four years ahead of the currency's recent rebound.

Unwinding some of this positioning would have facilitated much of the recent rebound.

But, looking ahead, National Bank of Canada "don't see much support for the CAD" from a fundamental perspective.

Above: "Speculators add to currency volatility" - NBC. Chart shows net speculative positions of non-commercial traders on the CAD.

The bank's forecasts for a weakening global economy and the potential for more aggressive rate cuts in Canada are set to weigh.

Underpinning future rate cuts would be Canada's softening economy: according to the Conference Board of Canada, consumer confidence in Q4 was even lower than at the start of the pandemic and during the 2008-2009 recession.

"This comes at a time when businesses are facing difficult decisions that could translate into a weak appetite for hiring," says Marion.

Above: "Soft data do not suggest revival in months ahead" - NBC. Chart shows Canadian Consumer and Small Businesses Confidence Index (quarterly data, after two -months of data in Q4 2023).

Bank of Canada's recent acknowledgement that the economy is no longer in excess demand is also telling: "we could see a more substantial change in tone from the BoC if data over the coming weeks confirms a soft economy," says Marion.

"In our view, the time for easing isn't too far away and it will be more aggressive than in the US in 2024," he adds.

NBC now expects USD/CAD to move towards 1.45 in the coming months (end of Q2 2024) and don't see much room for CAD appreciation until the second half of 2024.

The Pound to Canadian Dollar is forecast at 1.70 by year-end, 1.68 by the end of the first quarter of 2024, 1.74 by the end of the second quarter and 1.72 by the end fo the third. The exchange rate is at 1.70 at the time of writing.

The Euro to Canadian Dollar exchange rate is forecast at 1.46, 1.45, 1.49 and 1.48 at the above points in time. The pair is at 1.4690 at the time of writing.