Canadian dollar likely to remain at lower levels in short term, but stronger in medium term

The Canadian dollar was dragged down at the beginning of this year by the renewed decline in oil prices. But, due to the recovery of the oil price since, the Canadian dollar has been able to gain certain ground since mid-January. The exchange rate, against the U.S. dollar also gained due to the fact that market lowered the Fed rate hike bets after the growth concerns in China, subdued U.S. economic data and the surprising Brexit referendum result, noted Commerzbank.

But, the U.S. Fed is expected to hike the rates in December 2016. Thus, the USD/CAD pair is expected to trend higher towards the end of 2016. This might it easier for the Bank of Canada. The Canadian central bank still requires a comparatively weaker CAD to underpin the competitiveness of domestic firms to boost foreign demand. This signifies that the Bank of Canada might have to wait for quite some time before it begins normalizing monetary policy.

According to Commerzbank, the possibility of a first rate hike by the BoC might emerge during the end of next year. Only then will the CAD appreciate markedly on a sustainable basis against the USD. Meanwhile, as the European Central Bank would continue to be expansionary for some time and also ease its policy further towards the end of 2016 and the beginning of 2017, the Canadian dollar is likely to strengthen against the euro in the long term, especially in 2017 when it becomes evident that the monetary policies of the ECB and BoC are diverging markedly, added Commerzbank.