Outlook for CAD remains challenging, USD/CAD likely to trade at 1.30 by end-2016

The outlook for the Canadian dollar continues to be challenging.  The near-term risks are geared towards a slightly lower CAD against the USD (1.33/1.35), said Scotiabank in a research report. The USD/CAD pair is projected to trade at 1.30 at the end of December 2016, added Scotiabank.

In the first half of this year, the Canadian domestic growth trends were weak, even without the impact of the Alberta wildfires. However, it might rebound in the third quarter. It does not appear that growth can match the Bank of Canada’s expectations at this point. But certain downward adjustment to the official outlook might be made during the October meeting.

The economy’s external front is struggling, with volumes of export declining over 5 percent in the year through June. This is the worst performance since 2009 and implies that the central bank’s narrative of rebounding export trends, particularly in the non-resource sector, supporting growth continues to be wide of the mark at this point, according to Scotiabank.

Furthermore, business investment continues to weaken; however, the pace of decline seems to be slowing, leaving growth dependent on domestic sources for a bit longer time. Weakness in growth and exports imply headwinds for the Canadian dollar in the next few months.

The Canadian dollar faces a more immediate threat from the renewed weakness in energy prices. Even though short-term market correlations between the Canadian dollar and crude oil prices have weakened in recent weeks, the linkage remains positive. Subdued crude prices would go mostly in hand with a lower CAD.

“The turn lower in crude – after a 20% rise in WTI from the recent lows had speculators thinking in terms of a new “bull market” – reflects the ongoing supply/demand imbalance that seems set to persist a little longer, especially while price discipline remains absent among producers”, stated Scotiabank.