Canadian Dollar Forecast for 2014 Lowered, 1.17 Possible vs US Dollar say TD Securities

The Canadian Dollar (CAD) is forecasted to endure a weaker 2014 than analysts at TD Securities had previously thought.

Has the February rally run its course? Yes, says analyst Shauns Osborne at TD Securities who says evidences suggests that an important low in USD/CAD was possibly forming. The market endorsed that view emphatically shortly afterwards, ultimately driving the USD to its biggest 1-day gain (in percentage terms) against the CAD since late 2011.

This ensures the bullish US dollar to Canadian dollar exchange rate forecast (USD/CAD) for 2014 is on target.

TD Securities have told clients that they are raising their USD/CAD forecast for 2014 and now target a mid-year rate a little above 1.17. This is a Canadian to US dollar exchange rate of 0.8547.

(Note: Our CAD quotes are taken from the inter-bank markets. Your bank will deliver your currency after levying a spread on the rate. However, an independent FX provider will guarantee you a more competitive spread, thus delivering up to 5% more currency. Please learn more here.)

USD vs CAD Forecast hit 11 months too early

We have maintained a negative view on the CAD outlook versus the USD over the course of the past year. USDCAD reached its highest level since July 2009 this week, just below 1.12 and a little under a big figure above our end 2014 target with more than 11 months of the year still to go.

USD peak at mid-year 2014

With USD-bullish (growth, Fed tapering)/CAD-bearish (BoC policy bias, low inflation) dynamics still playing out, we are revising our end-2014 target for USD/CAD up to 1.15 but expect a peak in funds to occur around the middle of the year a little above 1.17 (for internal purposes, we determine the CAD forecast in US cent terms and we estimate the low point for the CAD to be USD0.85).

Low inflation to prompt a dovish Bank of Canada

Low inflation, with CPI entrenched at the low end of the central bank’s target zone, is a concern for policy makers and Governor Poloz was careful to stress that the door to lower rates was slightly wider open—the threat of lower rates is not an idle one, in other words.

Poloz would be happier with a weaker CAD

Comments in the post-meeting press conference (January) highlighted Governor Poloz’s lack of concern about the weakness seen in the CAD recently. He termed the slide in the exchange rate (8.5% in terms of the BoC’s effective CAD index since he took over in Ottawa) as “the icing on the cake” for Canadian exporters.

Canadian Finance Minister Flaherty stated that there was no deliberate plan underway to drive the CAD down. But by clearly signalling that he is comfortable with the swift and extended decline in the exchange rate, it needs little imagination to figure that Governor Poloz is tacitly endorsing the trend and will not oppose a further slide in the CAD.

The bull trend has further to run

The bull trend in USDCAD is well-developed but is showing no sign of turning lower or reversing. Our near-term technical bull target is 1.1265/75; we think a clear and sustained move above long-term retracement resistance in the low 1.12s (which out short-term target suggests is achievable) will pave the way for an extension towards 1.1667 (61.8% retracement resistance derived from the 1.31/0.94 decline seen between 2009/2011).

USD strength prompts forecast upgrade

A significant element of our positive view on the USD relates to the strength of the US economy—no longer in need of emergency support from the Fed—and the unfolding process or reducing accommodation, This puts the Fed on an opposite policy course to BoC and provides the USD with significant support via yield spreads in the belly of the curve, rather than the short-end which remain depressed by forward guidance.