Canadian Dollar: Downside Risks Building Forecasts BNP Paribas

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The Canadian Dollar is one of the better-performing of the major currencies of the past six weeks, but economists at a global investment bank say the currency will likely struggle over the remainder of 2023.

Predictions for Canadian Dollar weakness into year-end are made by BNP Paribas - the France-based global investment bank and lender - in a new research note that details its latest set of foreign exchange forecasts.

The recent recovery can be attributed to expectations for further Bank of Canada interest rate hikes following stronger-than-expected inflation levels in Canada, but these factors are unlikely to drive an enduring recovery in the currency.

"The CAD has outperformed the rest of the G10 complex on the back of a strong April CPI print and a beat in Q1 GDP, led by strong consumer expenditure, which caused additional Bank of Canada rate hikes to be priced in, followed by a 25bp rate hike in June," says Parisha Saimbi, G10 FX Strategist at BNP Paribas in London.

"We remain cautious on the CAD in the near term," she adds.

The bank's forecasts do however show the Canadian Dollar will outperform the Pound, a currency BNP Paribas is particularly bearish on for the remainder of 2022, as detailed here.

Yet, a more sustained rally in the Pound to Canadian Dollar exchange rate (GBPCAD) is said to be on the cards in 2024 as the GBPUSD recovery is expected to outpace the USDCAD recovery.

The Dollar is meanwhile expected by BNP Paribas to experience a summer of strength, explaining why analysts have raised their forecasts for USDCAD over the remainder of the year.

Dollar declines from 2024 can then be expected in 2024, allowing the Canadian currency to recapture lost value against the Greenback.

"We continue to see scope for a mild recovery in the CAD versus the USD over the next two years, as the USD structurally weakens and global growth expectations stabilise and eventually improve," says Saimbi.

But because "the CAD is often used as a USD proxy, we expect it to underperform other G10 currencies during a medium-term USD decline," says Saimbi.

BNP Paribas forecasts the Dollar-Canadian Dollar exchange rate to be at 1.31 by year-end, and 1.30 by the end of 2024.

The Euro-Candian Dollar rate is forecast at 1.47 by year-end 2023 and 1.54 by the end of 2024.

The Pound-Canadian Dollar exchange rate is forecast at 1.66 by the end of 2023 and 1.74 by the end of 2024.