Canadian dollar forecast 2014: February outlook from Canada's Scotiabank
- Written by: Gary Howes
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The February update to the 2014 Canadian dollar exchange rate forecast sees the CAD recovering in the latter half of 2014.
The Canadian dollar (CAD) continues to weaken with a February rally coming to a halt on Thursday/Friday.
Analysts at Scotiabank have confirmed to clients that they are inline with consensus maintaining a bearish Canadian dollar forecast for the first half of 2014.
However, the outlook picks up for the latter half of the year with an eventual retrace of earlier losses shaping up.
We hear from Scotia's Eric Theoret as to the reasoning behind the bearish, then constructive, Canadian dollar forecast for 2014.
Spot rates for reference:
BoC vs US Fed
From the BoC’s perspective even a 10% depreciation in CAD between September 2013 and January 2014, leaves the currency as strong and posing competitive challenges for Canada’s non-commodity exports.
In addition, a generally dovish tone to the January update pushed out the expectations for higher interest rates in Canada well into 2015; providing an additional weight to the currency.
Data releases remain uneven
Fundamental data releases have proven uneven, which have exacerbated uncertainty over the economic outlook for Canada. In addition, ongoing uncertainty in the Canadian oil sector at a time of rising US domestic production increases has also played a hand in shifting sentiment towards a more bearish stance.
Market bearish on CAD
Investors favour short CAD positions leaving the market still bearish but also one-sided. Together, these factors are expected to continue to weigh on CAD in the first half of the year.
Beat the Bank on GBP/CAD money transfers and payments
Forecasting a second half 2014 recovery in CAD
By the second half of 2014, the fundamentals pressuring CAD are expected to shift. An improving US economic landscape and a weaker CAD are a powerful combination that is expected to support Canadian exports and the economic backdrop. However it is interest rate policy that is likely to be the most important driver of CAD. As the Fed’s bond buying program slows and fundamentals in Canada firm monetary policy in both the US and Canada is likely to stabilise.
It is this that will be the key to stabilising CAD. Leading into 2015 global growth is expected to improve; historically CAD has traded as a pro-cyclical currency, strengthening in times of global growth and weakening when global fundamentals are weak.
Accordingly, the evolving global backdrop, still viewed as fragile, should also begin to support CAD.
In addition, an improvement in oil pricing, with a narrowing in spread between Brent and Canadian Western Select priced oil combined with more clarity over Canadian oil infrastructure plans should remove some of the uncertainty around the currency. Accordingly we hold a Q214 USDCAD target of 1.15 with a Q414 target of 1.11.
Economic performance not all that bad
Canada’s economic performance remains mixed. Domestic demand is relatively buoyant, though more moderate job growth suggests consumers will be cautious borrowers and spenders in the year ahead.
Even so, manufacturing sales are slowly beginning to pick up, with producers of motor vehicles and building materials benefitting from strengthening US auto sales and residential construction. Exporters should get a further lift from a weaker Canadian dollar. Meanwhile, non-residential construction remains supported by industrial, commercial and infrastructure spending. Resource-related activity has moderated, reflecting less buoyant commodity prices as well as temporary production disruptions and supply bottlenecks, but remains a source of ongoing support.
Real GDP growth is expected to pick up to around 2½% this year, following an estimated 1.8% advance in 2013. Heightened retail competition, muted wage gains, and softer food and energy prices have depressed price trends, with both core and headline inflation falling to the lower bound of the Bank of Canada’s 1-3% target range at year-end.