Canadian Dollar Forecast to Weaken Against USD and GBP, No Rate Cut Foreseen at BoC
The Canadian dollar (CAD) is struggling against the pound sterling and US dollar with more losses forecast.
The only risk to the negative-CAD stance we are currently holding is a Bank of Canada event due mid-week. Markets are however pricing in little chance of a significant change in policy from the Bank being announced which should keep current trends progressing.
Starting with sterling, the British pound to Canadian dollar exchange rate (GBPCAD) nosed above 1.91 in late May trade to extend is correction from the April trough. GBP-CAD remains tipped to attack the 2.0 level as technical momentum is advocating for further advances.
“We have been looking for a bounce to the 1.90/1.92 area to come through fairly quickly and continue to target 2.00/2.02 as a medium-term objective. Intraday weakness quickly reversed so far today and we think GBPCAD remains on track for more gains. Look to buy into modest GBP dips from here; medium and longer-term trend momentum studies are positively aligned for the GBP, implying that short-term corrective gains should be limited,” says analyst Shaun Osborne who has updated us with his latest Canadian dollar forecasts.
Dollar Bites a Chunk out of the CAD
Meanwhile, the US dollar to Canadian dollar exchange rate (USD-CAD) is also expected to climb. We had been talking, at previous points in May, about the potential for a decisive move lower in the pair. These forecasts were predicated on the failure of support at 1.19, this failure has not transpired though and the recovery in the USD complex now has us expecting further losses for the USD v CAD exchange rate.
“A softening oil price, allied to supportive CAD US front-end spreads, suggests the gains have yet to run their course, in the process suggesting we are set to test strong resistance at 1.2388 (lows from April 8),” says Jeremy Stretch at CIBC.
Driving the rebuilding of positive sentiment in the US Dollar is ongoing Fed rhetoric that warns of interest rate rises commencing in 2015.
Following on from Yellen at the end of last week we have had vice Chair Fischer and Mester hitting the airwaves. The Fed chair of Cleveland, who is a Fed voter in ‘16, argues that ‘the time is near’ for the central bank to raise rates.
Look for an improvement in US data points in June to provide the necessary confirmation the USD has actually turned the corner, this could pave the way for deeper and sustained gains in USD-CAD as the longer-term trend of USD appreciation restarts.
Bank of Canada: Unchanged
As mentioned we expect the Bank of Canada to keep its policy rate unchanged at 0.75% on Wednesday. With the last meeting having coincided with the release of its new MPR, we do not expect the statement to contain any substantive changes.
The BoC has signalled that it is comfortable with the current level of interest rates and its January rate cut has bought it some “insurance” against disinflationary risks.
“Economic activity has stabilised recently and the bounce back in oil prices has also been a positive. However, the recent appreciation of the CAD (REER has appreciated by more than 4% since early April) offsets some of these improvements,” say Barclays in a currency note on the matter.
Furthermore, Barclays believe the effect of lower oil prices on investment and consequently growth will be long lasting, whereas higher unit labour costs in the manufacturing sector are likely to impede the economy’s ability to take advantage of a weaker currency.
“We remain bullish on USDCAD over the coming months and remain short CADMXN,” say Barclays.
CIBC’s Stretch does however caution that there is the possibility of a strengthening in the CAD:
“The BoC's increasing optimism as regards the H2 outlook may provide some rationale for the market having moved net long of CAD for the first time since late September. A more upbeat BoC, downplaying the need for additional monetary insurance now may help to cap USD CAD topside ahead of 1.2400/10.”
