Canadian Dollar Outlook

1 - 3 Month Outlook 

Oil prices have a significant correlation with CAD over a medium-term horizon (3- months). With oil prices still near the bottom end of this year's range, associated growth headwinds will persist for the Canadian economy into Q4 2015 and Q1 2016. Energy sector capital spending forecasts for 2016 will be watched closely in this regard, after falling an estimated 40% in 2015. The Bank of Canada expects a further drop of 20% in 2016, with the weakness dragging the growth contribution from aggregate fixed investment lower by 0.6pp. 

"Our bullish outlook for USD/CAD remains intact, we have raised our forecast peak from 1.3600 in Q4 2015 to 1.3800 in Q2 2016. The catalysts for our changes include the lingering challenges presented from low commodity prices as well as interest rate dynamics", notes RBC Capital Markets. 

While a weaker CAD will help attempt to foster a larger contribution to domestic growth from non-energy exports, weakness in the October RBC/Markit manufacturing PMI (the reading of 48.0 was the fourth consecutive monthly decline and a record low for the index since inception in October 2010) highlights the challenges to growth that are present and suggests that there is more work left to be done on the currency front. 

On the interest rate front, markets are pricing in the probability of a Fed rate hike in December at approximately 50%, with 72% odds of a hike by March. In addition, the lack of a policy move in December does not rule out the prospect of a move in Q1 2016, with US-CA interest rate differentials expected to lend support to USD/CAD through that period. Technically, a daily close above resistance at 1.3279 would set the stage for a re-test of the 2015 high at 1.3454. 

6 - 12 Month Outlook

A gradual pullback is expected in USD/CAD in H2 2016, ending the year at 1.3300. WTI crude oil prices are expected to improve to an average of USD57 in 2016, the benefits of a weaker CAD are expected to lead to a pickup in economic growth that will shift the focus back to gradual removal of accommodation in Q4 and lead to a convergence in US and Canadian monetary policy.