Canadian Dollar Forecasts: Worse to Come for CAD + Sterling and Euro Rally Interrupted for Today

By Gary Howes

The Canadian dollar (CAD) is forecasted to see further falls against the US dollar and other major currencies as eyes focus firmly on the January 22nd BoC decision.

The Canadian dollar is seeing a bout of strength on Wednesday afternoon in London with some good gains being seen against the GBP in particular.

A look at the forex markets shows:

The pound sterling to Canadian dollar is 0.47 pct lower at 1.7916. The US dollar to CAD exchange rate is 0.09 pct higher at 1.0957. The euro to CAD exchange rate is 0.52 pct lower at 1.4896.

NB: Our CAD quotes are taken from the spot markets; your bank will subtract a discretionary spread when passing on their retail rate. However, an independent FX provider will guarantee to undercut your bank's offer and deliver you up to 5% more currency. Please learn more here.

The move higher in the CAD against a number of currencies is likely to be technical in nature - extended short positioning against the CAD will need to be unwound at various intervals in its trek lower.

Meanwhile, the currency has largely ignored today's news that December's home sales were down 1.8 per cent from the previous month, the third decline in a row.

These figures only confirm that the Canadian economy is slowing down, and this is being felt in the forex markets via the weakened CAD.

Forecasting further losses for the Canadian dollar

We touched on the issue of a lower Canadian dollar forecast issued by UBS yesterday.

UBS analyst Geoffrey Yu has today discussed the issue further warning that the situation will likely get worse for the CAD before an improvement shapes up.

Commenting on the outlook for the USD/CAD, Yu says:

"We see further upside ahead, and look for the pair to trade up to 1.12 in 3m. The resumption of the broad-based USD rally is only part of the story.

Following a dovish broadside from Governor Poloz last week, attention is now squarely focused on the upcoming Jan 22 Bank of Canada policy decision, which coincides with the publication of the quarterly Monetary Policy Report.

An intensification of the already-dovish rhetoric would likely be enough to reinforce the USDCAD uptrend.

A possible shift to an easing bias could amplify it further. The bar to taking this additional step is arguably quite low. Poloz has already dropped the explicit tightening bias."

Poloz took a further dovish step on Nov. 20, noting that although the BoC "considers the risks around its projected inflation path to be balanced, the fact that inflation has been persistently below target means that downside risks to inflation assume increasing importance."

Yu goes on to say that the Canadian currency will however find support from external interest in Canadian equities:

"It’s not all bad news for the Canadian dollar though. Foreigners have rediscovered their appetite for Canadian stocks – although it is still an open question if the next instalment of portfolio flow data due on Thursday confirms the trend."