HSBC Strategists Forecast USD/CAD to fall to 1.25 by end of 2016

HSBC see the Canadian dollar recovering in 2016 on the back of a new programme of fiscal stimulus adopted by the recently elected government.

HSBC’s Bloom and Maher see the loonie rising in 2016 and have revised down their USD/CAD forecast from 1.35 to 1.25.

This stands in contrast to many other analysts who continue to see the currency weakening as a result of the falling oil prices and a dovish central bank policy outlook.

The key factor in CAD’s revival, according to HSBC, will be “unorthodox fiscal policy” from the new Canadian government, which is introducing a counter-cyclical fiscal boost.

In their note they explain their thinking in more detail:

“The conventional wisdom throughout this financial crisis is that monetary policy should do the heavy lifting to get growth and inflation back on track. To that end, convention suggested the best contribution fiscal policy could make was to help keep interest rates low by ensuring government finances were robust.”

“However, with both monetary and currency stimulus hitting exhaustion, a fresh approach is needed. Canada's new government, with its plan for a counter-cyclical fiscal boost, may be the test bed. The CAD will be the likely beneficiary, especially given the currency's growing sensitivity to interest rate differentials.”

USD to weaken

The revision lower for USD/CAD can be partly explained as resulting from HSBC’s bearish forecast for the greenback in 2016.

Bloom sees the U.S dollar as overvalued and expects the search for a “peak-rate” to begin soon, positing the actual Fed December meeting on December 16 as a probable time for the peak-rate “debate” to emerge.

“Now that the FX market has largely priced in a rate hike for December, the narrative is swiftly transitioning to the ‘peak rate’ debate.”

Consensus still bearish on Oil

A major consideration in the valuation of CAD is the price of oil.

Given there are no signs of that rising yet, it remains a missing piece in the CAD-strength HSBC forecast jigsaw puzzle.

Despite reaching record lows and, alongside other commodities, now appearing to represent good value, there is no let-up in the bearish trend in sight.

Indeed, some analysts are even more bearish on oil as sanctions on Iran are set to be lifted in 2016, allowing the country to add its supply to the already saturated market, potentially leading to even more devaluation.

Mainstream view still bearish for CAD

Most market-watchers are still bearish CAD.

In its latest reaerach note CIBC World Markets provided a compelling argument for a weaker loonie: 

"The latest fall in oil prices, including weak near-term economic outlook underscores our belief that near-term risks to the loonie remained skewed to wards further depreciation rather than rebound,"

The not goes on to say:

"The loonie has been hit by lower oil prices and the divering policies of the Federal Reserve, which is poised to hike interest rates, and the Bank of Canada, which is poised to hold steady for months still."