CAD outlook : RBC

RBC Capital Markets notes:

1 - 3 Month Outlook - USD/CAD toward the highs

USD/CAD found its low in mid-May before bouncing sharply through the second half of the month. As we notedin early May, the main drivers of the pullback appeared to be short-term, and had nearly run their course. 

We view the bounce in recent weeks as a re-establishing of the broader trend for the coming months, driven by: 

1) Monetary policy divergence. The BoC has taken on a firmly neutral message, and our economists expect the BoC to keep rates at 0.75% through to Q2 2016. Regardless of the exact timing of an eventual rate increase, the issue is that the BoC hiking cycle will considerably lag that of the Fed, which is likely to begin in the second half of this year. 

2) Greater downside risk to Canadian activity. Q1 growth was even worse than anticipated, but what matters now is whether we begin to see a decent rebound in Q2, as the BoC has said they expect. The clear risk is that the rebound is more sluggish, which would weigh on rate expectations and AD. 

3) Oil has bounced, but we do not anticipate any significant shift in the larger macro outlook unless prices rise above the breakeven threshold for new oil sands projects (WTI above the mid-USD70s/bbl). Our commodity analysts do not expect a strong rebound in oil prices (forecasting USD53/bbl average WTI in 2015). 

6 - 12 Month Outlook - New highs in store 

Further out, we continue to look for USD/CAD to extend to new highs in the second half of 2015. We believe the above entioned drivers of the trend higher should come to a head later this year, and are projecting a peak in Q3 of 1.31. 

Beyond that, we look for a gradual pullback into 2016 as oil prices recover somewhat (RBC forecasting WTI USD77/bbl in 2016); the benefits of a weaker currency show more clearly in exports and non-energy capital investment; and US/CA monetary policy begins to converge. 

Independent USD strength remains an important factor in that forecast, which means CAD's performance against the rest of the majors should be more mixed. One issue that we continue to believe will see CAD generally underperform against several of its G10 peers over the long run is the persistent current account deficit that has not been financed by long-term capital flows since late 2013. 

CAD's depreciation over the past year has helped improve the deficit, but more recently, lower oil prices have put further strain on that balance (-2.5% of GDP in Q1 vs. -2.1% in Q4).