CAD likely to be at lower levels in short term, but to strengthen in medium term

The Canadian dollar has been dragged down in the beginning of 2016 by the renewed decline in the oil price. But the currency has been able to gain some ground since January. The Canadian dollar has also benefited against the USD from the fact that the market has greatly priced out additional hikes from the US Fed after the growth concerns in China, the Brexit referendum and subdued US economic data.

The short-term development of the price of oil leads to downside risks for the Canadian dollar. Furthermore, the US Fed is now expected to hike its rate in December 2016, noted Commerzbank in a research report. Therefore, the USD/CAD pair is expected to trend higher in the months to come, particularly as the US dollar is in demand as a safe haven amidst the rise in uncertainty.

This makes the life of Bank of Canada easier, stated Commerzbank. The Canadian central bank still requires a relatively weak currency to underpin the competitiveness of local firms and to boost foreign demand. This signifies that the Bank of Canada will wait longer than the US Fed to hike interest rates.

“Only once a BoC rate hike becomes foreseeable towards year-end 2017 will CAD appreciate notably and on a sustainable basis against USD”, added Commerzbank.

As the European Central Bank is expected to remain expansionary for certain period of time, and is also likely to ease its monetary policy again towards the end of 2016, CAD is expected to gain against the EUR in the long term, especially in 2017.