Canadian dollar outlook

The Canadian dollar (CAD) was relatively flat in August, recovering from its late-month multi-year lows on the back of a remarkable three-session, 30% rally in oil prices (WTI) into month-end.

The risk for CAD remains primarily related to oil, with added concern surrounding the Bank of Canada (BoC) policy decision on September 9th and the looming election in midOctober. Broader turbulence arising from the looming start to Fed normalization presents an added risk, along with the ongoing impact of turmoil emanating from China. Technicals and sentiment are biased to further CAD weakness, while fundamentals are starting to signal a modest shift in the balance of risk. 

CAD remains most sensitive to the path for oil prices (WTI), with loosened balances expected to prove a weight into year end and through the first half of forecast for CAD is largely driven by the outlook for oil prices, given the BoC's heightened focus on the mitigation of the oil price shock. The oil price stabilization should provide for CAD support through the latter half of 2016. 

With regards to relative monetary policy, the BoC's primary focus remains tied to oil, its 'natural sequence' of non-energy exportled growth a secondary consideration in the face of financial stability concerns. 

"We remain biased to a BoC policy hold throughout our forecast profile, with steady US growth providing for a shift in the balance of risk through 2016", says Scotiabank.

Near term CAD weakness is likely to result from firming expectations for Fed policy normalization, with a view to a liftoff in the fourth quarter. CAD sentiment remains bearish, with investors holding a sizeable $4.5bn net short CFTC position as of August 25th. The position has shown signs of stabilization in recent weeks, with CAD bears unwilling to put on fresh shorts. CAD technicals hint to further downside risk, with trend indicators showing a solid bearish bias. The lack of confirmation from momentum provides a conflicting signal; however, this development has failed to arrest the CAD decline through much of this year. 

"We look to CAD weakness into year end and hold a Q4 2015 target of 0.73 (USDCAD at 1.37)", added Scotiabank.