Canadian Dollar Forecasted Lower as External Current Account Deficit Weighs

A mid-2015 forecast on the Canadian dollar from National Bank of Canada suggests the USD/CAD remains on target to hit 1.30.

National Bank of Canada’s NBF unit have told clients in a June foreign exchange forecast note that their verdict on the CAD is negative.

The update echoes the message contained in our most recent story covering Scotiabank’s mid-year forecast.

The predictions come as the Canadian dollar is pushed lower by the US dollar in the mid-month session with USD-CAD quoted at 1.2329 at the time of writing.

CAD is soft, falling on the back of softer oil prices amid a renewed focus on the loosening global balance resulting from greater OPEC supply.

The pound sterling is also pressing up against the Canadian currency with the GBP-CAD at 1.9170. High street banks are seen offering a rate around 1.8633 for international payments. A leading independent is seen delivering a rate around 1.8940, in some cases up to 5% more currency can be delivered when using such a specialist.

Analysts tell us sterling could hit 2.00 in coming months, read more on GBP-CAD below.

GDP Growth Will Be Below BoC’s Expectations

Analysts at NBF cite downside risks to the Bank of Canada (BoC’s) call for above-potential growth of 2.7% on average in the second half of the year.

One source of weakness in the first quarter of the year, namely business investment, could extend into the second quarter as the impacts of the oil shock continues to be felt, particularly in the energy patch.

“Another factor that could prompt more dovish talk by the BoC is an appreciating Canadian dollar. The central bank pointed to the loonie’s earlier strengthening in synch with oil prices and said “if these developments are sustained, their net effect will need to be assessed as more data become available in the months ahead,” say NBC.

Given how overall growth will be dependent on trade, the central bank will do what it can to keep the Canadian dollar grounded.

Indeed, NBF see the Canadian dollar remaining vulnerable when the massive current account deficit is taken into account.

In essence the country remains dependent on foreign capital inflows.

Canada’s external deficit widened in Q1 to C$17.5 bn (or 3.5% of GDP), the worst since 2010.

“The deterioration shouldn’t be surprising given how slumping oil prices and temporary trade disruptions (due to bad weather) wrecked the goods trade balance in the quarter. But what was really concerning was how the deficit was financed, i.e. entirely by portfolio inflows, which could reverse on a whim,” says the June currency research note.

The reliance on unstable flows such as those, instead of the more stable FDI flows, leaves the Canadian dollar vulnerable to enhanced volatility and further depreciation.

“All told, we remain comfortable with our view that USDCAD will move even closer to 1.30 by the end of the year,” say National Bank of Canada.

Expect weakness in USDCAD to influence strength in the GBPCAD - the outlook for pound sterling therefore remains positive particularly as the Bank of England heads towards its first interest rate rise in years.

GBPCAD has pushed through short-term resistance at 1.9075 (inverse Head & Shoulder neckline) and as made some decent progress towards the short-term bull target of 1.93.

“Better trend momentum on the short-term studies supports the bullish outlook near-term and we think new, short-term cycle highs (above 1.9225) would be more broadly supportive for the cross. We reiterate our longer-term bullishness on the cross; we look for 2.00/2.02 in the next 3-6 months,” predicts Shaun Osborne of TD Securities.