US dollar / Canadian dollar exchange rate forecasted at 1.14 in 2014
- Written by: Gary Howes
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The Canadian dollar will eventually start to benefit from the US growth story, but one forecast suggests significant declines lie ahead in 2014.
NOTE: The February Forecast Update for CAD from RBC Has Upgraded the Outlook for the Currency in 2014. Read the Forecast Here.
Danske Bank have released their latest Canadian dollar forecasts in which they see further losses on the horizon. The USD/CAD is predicted to fall to 1.14 which will of course pressure the entire CAD complex. (Click here to see table).The call comes as analysts foresee further divergence between US Federal Reserve and Bank of Canada policy.
Danske Bank analyst Christin Tuxen tells us why he is forecasting a lower Canadian dollar:
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US recovery will spill over to Canada, eventually
Canada stands to benefit from a US recovery, which we see materialising next year. However, so far positive spill-over to the Canadian economy have been limited and with Fed tapering coming up, support for USD/CAD should remain in place.
Divergence between Bank of Canada and US Fed
As the BoC has dropped its language about the need for future interest rate hikes and voiced worries over low inflation recently, we see potential for ‘low for longer’ to be priced in Canada. This clearly contrasts with the Fed, where the tapering process seems on track to end QE late in the year. In our view, a divergent Fed-BoC outlook should support USD/CAD on a 3-12M horizon.
The Bank of Canada (BoC) has maintained its overnight lending rate at 1.00% for the past two years. In its December statement, it emphasised that 'downside risks to inflation appear to be greater’. It is now very clear that the BoC will lag the Fed in scaling back on stimuli. We are not convinced the BoC will go as far as cutting rates but a softer statement (if not outright easing bias) could lead the market to start pricing this in to an even greater extent (roughly half a 25bp cut for mid-year).
The Bank of Canada (BoC) has maintained its overnight lending rate at 1.00% for the past two years. In its December statement, it emphasised that 'downside risks to inflation appear to be greater’. It is now very clear that the BoC will lag the Fed in scaling back on stimuli. We are not convinced the BoC will go as far as cutting rates but a softer statement (if not outright easing bias) could lead the market to start pricing this in to an even greater extent (roughly half a 25bp cut for mid-year).
Flows
Speculators are still extensively short CAD.
(Traders increased bearish positions against CAD, driving the net short position to $6.2bn — closing in on the record $7.4bn short position from April 2013 as sentiment deteriorates on the back of domestic developments. The most recent CFTC data covers up to Tuesday Jan 14, they were released Friday Jan 17.)
(Traders increased bearish positions against CAD, driving the net short position to $6.2bn — closing in on the record $7.4bn short position from April 2013 as sentiment deteriorates on the back of domestic developments. The most recent CFTC data covers up to Tuesday Jan 14, they were released Friday Jan 17.)
Valuation - CAD seen as expensive
CAD remains expensive on PPP measures.
Oil prices
We expect oil prices to head lower in years to come and this could weigh on CAD. However, oil production is rising in Canada, suggesting that oil-related revenues will remain significant.
Risks to the forecast
If household sector imbalances fail to evolve constructively, the BoC may have to follow the Fed in scaling back on stimuli earlier than we currently expect.