Canadian Dollar to Fall Until 2016 say TD Securities

Updated Canadian dollar forecasts from a leading Canadian research institution have confirmed more losses may lie ahead for the already under-pressure currency.

Toronto-Dominion Bank's TD Securities have told clients that the CAD could be in for yet more declines and only in mid-2016 will we likely see the tide finally turn in favour of the currency.

At the time of publication the CAD is weak following another dire economic growth reading.

"Still no growth in Canada this year, disheartening news that leaves the loonie poised to make a run at fresh decade-plus lows. Canada’s economy unexpectedly contracted 0.2 percent in May versus forecasts of a flat reading," notes Joe Manimbo, referencing the underlying woes behind CAD under-performance.

At the present time the pound to Canadian dollar exchange rate (GBPCAD) is at 2.0377. Banks are offering around 1.9806 while independent providers are offering rates closer to the market at 2.0132.

The euro to Canadian dollar exchange rate (EURCAD) is at 1.4231.

The US dollar to Canadian dollar exchange rate (USDCAD) is a 1.3030.

Forecasting More of the Same

The trend is your friend - so the saying goes.

Based on this simple observation alone there can only be one loser, and that is the CAD. A look at the currency’s performance against the British pound shows a clear move:

However, we are wary that the bullish run delivered by the pound against the Canadian dollar is looking over-extended.

The Relative Strength Index (RSI) is at 78 and therefore screaming of overbought conditions. Anything above 50 and below 70 is seen as a positive momentum signal but anything over 70 is considered to be a deviation from the norm.

Thus, the move must stabilise or correct lower in order for stability in the GBP/CAD to be returned.

That said, in the last period of strengthening the RSI virtually stayed above 70 from November 2013 to March 2014 confirming the RSI is an imperfect indicator of impending weakness.

Nevertheless, “risks are skewed towards a weaker CAD, especially in the short-term, as the economy undergoes a structural re-alignment following the unwind of the commodity super-cycle,” say TD Securities in their latest currency forecast note to clients.

It is believed the Bank of Canada will continue to pursue a policy of steering the currency lower to aid non-energy exports.

Canadian manufacturers will need a weak currency to ensure they stay competitively priced on the global stage. If manufacturing can grow then perhaps the Canadian economy can unlock itself from raw material exports.

A 2016 Recovery for the CAD

“In appreciation of this, we look for a peak at 1.37 in H1-2016 before grinding lower in H2 when crude prices should glide higher,” say TD Securities in reference to their calls on the USD/CAD which will ultimately remain hinged on the oil price for the foreseeable future.

Concerning the forecasts for the pound / Canadian dollar exchange rate TD Securities have 2.03 pencilled in for the pair by December 2015.

The rate will rise towards 2.14 in March - June ahead of a Canadian dollar recovery from where the trend will likely reverse.

A level below 2.0 is seen towards the end of 2016.

The UK central bank has turned increasingly hawkish in recent weeks as the UK economy has gathered momentum.

“With rate hikes likely early next year, we think the GBP is likely to continue its recent outperformance,” say TD Securities.

Still no growth in Canada this year, disheartening news that leaves the loonie poised to make a run at fresh decade-plus lows. Canada’s economy unexpectedly contracted 0.2 percent in May versus forecasts of a flat reading. The loonie managed to gain on the news as disappointing data on U.S. wage growth overshadowed and weakened the big dollar.