CAD likely to remain low against US dollar in short term, to appreciate in medium term

The Canadian dollar has rebounded slightly against the US dollar from its multi-year lows in January due to recovery in the oil prices and also because the US Fed is still reluctant to resume its hiking cycle.

However, the Canadian dollar continues to be at historically weak levels. But the Bank of Canada requires the currency to be quite weak for some time in order to underpin the competitiveness of domestic firms and stimulate foreign demand.

The US Fed is likely to hike its rate in December, according to a Commerzbank research report. The Bank of Canada is expected to wait longer for its first hike in rates. Thus, the US dollar is likely to strengthen against the Canadian dollar in the months to come. There is a rise in demand for US dollar as a safe haven since uncertainty increased post Brexit vote.

Therefore, the market and the US Fed will do the job for the Canadian central bank in keeping CAD weak. Only next year, will the Canadian dollar will be able to appreciate significantly against the US dollar as speculation will rise that the Bank of Canada will raise rates, which it will carry out in late 2017, noted Commerzbank.

As the European Central Bank continues to be expansionary for a long time and the possibility that it will take action again by the end of 2016, the Canadian dollar is likely to gain against the euro in the long run. Meanwhile, the development of commodity prices will dominate CAD’s short-term outlook.