CAD Outlook

At the close of the first quarter of 2015, the Canadian dollar (CAD) had weakened 8% against the USD, outperforming only a handful of currencies. The weakness reflects three major themes: the economic consequences for Canada of the oil price collapse, Bank of Canada policy, and broad-based USD strength on the back of diverging global monetary policy and growth outlooks. 

"From here the pace of CAD weakness is likely to slow, but the currency is expected to reach fresh lows in 2015", says Scotiabank.

Due to lower oil prices, high Canadian household debt, and an extended housing sector, Canada's real GDP gain is expected to underperform US growth in both 2015 and 2016. Oil prices are vulnerable to geopolitical developments, which are difficult to predict, while the North American fundamental outlook is weighed down by large inventories and only early signs of slowing production. 

For the CAD, its near-term outlook is closely tied to oil prices. Over the medium term Scotiabank expects oil prices to retrace some of the recent losses. In January, the Bank of Canada (BoC) surprised markets by cutting interest rates on the uncertainty around oil prices and risks to financial stability. Since then, the BoC has maintained a dovish tone, noting large unemployment and output gaps, low inflationary pressures, and ongoing uncertainty. 

"We expect Canada to lag the first Fed interest rate hike by several quarters and expect this to weigh on the CAD in the near-term; however, once the BoC does turn towards higher interest rates, we expect theshift to be awkward for markets", said Scoitabank in a report on Wednesday.

The USD is expected to strengthen broadly on the back of its relative growth outlook and monetary policy cycle. The expected divergence has already driven strong gains in the USD across most currencies, a trend that is expected to continue but at a more moderate pace. 

"Sentiment for the USD is strong (with the CFTC reporting net long USD positions against all currencies)and technicals continue to support a strong USD outlook. Accordingly, the CAD is expected to reach fresh lows in 2015, closing the year at 0.75 (USDCAD at 1.33) but then stabilize in 2016, averaging 0.76 (USDCAD 1.32)", added Scotiabank.