Canadian Dollar Forecast: CAD Could Recover Yet

The Canadian dollar (CAD) has been under pressure since mid-October but there are suggestions that 2016 will prove to be kinder.

Lloyds Bank Research have told clients they believe the outlook is turning pro-CAD once more and the bottom in the Canadian exchange rate complex is nigh.

The Canadian dollar has advanced as the traders book profit on the recent run higher in the US dollar using the release of FOMC minutes on Wednesday the 18th as the excuse.

The pound to Canadian dollar exchange rate (GBPCAD) has also tracked lower taking the lead from the USDCAD headline pairing.

Those watching to transact on the GBP to CAD conversion should therefore be aware that moves will be heavily dependent on moves in the USD to CAD conversion.

“Technical analysis of the pair is signalling the potential for some sharp falls ahead as the bulls run out of steam,” warns Steven Knight, Market Strategist for Blackwell Global.

Knight notes tells us that markets regularly fall in to semi-predictable chart patterns that can be a harbinger of things to come.

“In the case of the Canadian Dollar, the pair has recently rallied strongly to the top of its range and now faces an unbroken area of resistance around the 1.34 handle,” says Knight.

“Taking a look at the hourly chart shows an ending diagonal pattern that appears to have just been broken.  Given the recent breach of the short term bullish trend line, the cessation of the diagonal could signal selling ahead for the venerable Loonie,” says Knight.

The analyst also cites some divergence from the MACD indicator as the highs became lower in contrast to the price action.

The US dollar is being supported by the 30EMA against the Canadian dollar and the pair will subsequently need to break through that level to cement a move lower.

“However, given the MACD divergence, price action’s position within a zone of resistance, and the cessation of the diagonal pattern, the odds are weighted to the short side,” says Knight.

However, technical traders at Goldman Sachs say they will look at any declines in the USDCAD exchange rate to take out fresh bets on a recovery:

"We now like to see the pair higher based on a bearish view on oil, with the following key technical levels: support at 1.3186 (55dma) and 1.3372 (Mon’s high) as the resistance."

Is the Canadian Dollar at its Nadir?

Has the Canadian dollar reached its low point? Lloyds Bank Research have told clients they believe the outlook is turning pro-CAD once more and the bottom in the Canadian exchange rate complex is nigh.

“We think that it is close to a bottom and the most will probably start to appreciate gradually through 2016, reaching 1.22 against the USD by year end,” say Lloyds.

The call echoes the views of other major currency analysts who see the CAD recovering in early 2016.

This is therefore a longer-term view and Lloyds warn that further falls could occur in the near-term.

Lloyds reckon the Bank of Canada (BoC) will not have to cut interest rates again now that US interest rates are tipped to start rising in late 2015 / early 2016.

“The gradual upward path for US rates expected from here probably limits the scope for further cuts in Canadian rates and increases the likelihood that the BoC will start to tighten policy sometime in 2016,” say Lloyds.

The likelihood that the new Liberal government will pursue a looser policy than its Conservative predecessor may also limit the need for the BoC to ease further.

However we also note that the BoC might be keen to ensure the exchange rate does not rise too quickly or too far as the economy will need the aid of a weaker currency.

With that in mind the central bank could surprise markets with a deliberately dovish tone over coming months which could keep the pressure on the Canadian dollar.