Canadian Dollar Forecast 2016: Oil Price Recovery to Drive a Stronger CAD
The pound to Canadian dollar is forecast to peak at 2.03 in 2016 say Lloyds Banking Group.
At the time of writing the GBP/CAD is quoted at 2.0313 - pretty much where analysts expect to see the best exchange rate over coming months.
The Canadian dollar continues to be buffeted by trends in global commodity prices and market risk sentiment allowing the pound sterling and US dollar to maintain long-term uptrends.
The ‘commodity’ currency has fallen by over 12% against the USD year-to-date and slid below 75 cents (USD/CAD 1.33) in August for the first time since 2004.
The impact of low global oil prices are apparently playing a significant role in CAD weakness.
"The sharp decline in Chinese industrial profits is the only legitimate reason for the weakness in not only the New Zealand dollar but other commodity currencies as well. Both the Australian and Canadian dollars fell sharply today as profits fell by the largest amount in 4 years," notes Kathy Lien, a professional trader with BK Asset Management.
A surprisingly ‘dovish’ US FOMC meeting had allowed the USD/CAD to briefly retrace to a five-week low near 1.30 earlier this month confirming the role played by central bank interest rate differentials on a global scale.
Therefore, "it is clear that near-term prospects for the CAD remain closely tied to external market developments," say Lloyds Bank Commercial Banking who warn of further near-term weakness in their latest International Financial Outlook note to clients.
It is noted that the domestic economic picture is however showing tentative signs of improvement, albeit recent data also confirmed GDP contracted for a second successive quarter in Q2.
The BoC left the policy interest rate on hold this month after two reductions already this year, citing the weaker CAD as supportive for the economy.
Lloyds Bank Commercial Banking forecast the pound sterling to Canadian dollar exchange rate (GBPCAD) to hit 2.03 by the end of 2015 before falling to 1.98 by March 2016 and 1.81 by June 2016.
The pair is predicted to end the year at 1.71.
USD/CAD is meanwhile forecast at 1.30 at end 2015, easing to 1.20 at end Q2 2016. To see the Lloyds table in greater detail please see here.
Oil Price Outlook Improves Suggesting the CAD Will Turn a Corner
A key driver of the Canadian outlook will of course be movements in oil prices - the CAD will find support should prices continue to rise.
Lloyds believe that supply-side news over the past month could be perceived as constructive for crude oil with US production falling for a sixth consecutive week to 9.12 mb/d through 11th September.
This compares with a peak production of 9.61 mb/d in the week ending 5th, suggesting that supply is responding to depressed prices.
This is a view shared by the IEA in its September Monthly Oil Report, estimated that non-OPEC production will decline by 0.5 mb/d next year - its sharpest fall in 24 years. Resumption in the decline of US rig counts and evidence that US shale firms are beginning to come under financial strain only add to the case for continued declines in production.
According to Lloyds oil prices are due to pick up:
"Further supply-side adjustment, alongside a restoration in confidence around China’s crude demand leaves our Q4 2015 average Brent forecast intact at $60/bbl. The risks to our forecast, however, remain skewed to the downside due to increased uncertainty around global crude oil demand and US interest rate policy."
In three months WTI prices are forecast to rise from 46 to 61 USD a barrel.
