US Dollar to Canadian Dollar Forecast Target at 1.40 say Deutsche Bank

The Canadian dollar has advanced against the US dollar for three days in a row now as a strong finish to the North American trading session saw the CAD find favour once more.

The Canadian currency had been in decline for much of the day as global markets sold off, confirming that for this currency investor mood is key.

This is a handy graph if you want to understand how currencies react to negative market conditions. This shows how CAD reacted to the Friday stock market sell-off:

So for the near-term those watching the Canadian currency should be aware that how markets open on Monday will be key.

We note that gains against the dollar are coming in at a slower pace, there is the sense that the USD to CAD rate is building a bottom in the 1.3760 region.

If this support holds then a rebound could take place this week.

Deutsche Bank Forecast Canadian Dollar Declines Soon

Deutsche Bank have told clients in a special briefing note that they forecast CAD’s brief respite to soon end and the USD to start pushing the Canadian currency back down again.

After being hammered by its US counterpart for month after month, the Canadian Dollar mounted a stand at 1.4689 on January the 20th, and then rallied to its current level in the 1.36s.

The bank argues that the current rally was premised on a recovery in oil, however, they do not see oil recovering high enough to make Canada’s relatively expensive-to-extract oil profitable, and this eventually will pull CAD back down:

“While the CAD short covering should continue on the back of a deal to freeze oil production, oil prices should still stay far too low for

"Canada’s expensive oil sand leaving Canada’s current account well in deficit and the Bank of Canada ready to ease.”

A List of Reasons Why the Canadian Dollar Should Turn Lower

Deutsche give a list of insights into CAD’s fundamental reasons for weakening versus the dollar:

The first is that they see little demand for Canadian dollars coming from foreign investors seeking to buy Canadian shares:

“While the Canadian energy sector recovers there is little flow behind it as evidenced in ETFs.

“After retreating from Canadian equities with the collapse of oil in 2014, foreign investors are likely to stay prudent until oil prices clearly trend towards the fifty to sixty-dollar region needed for oil sands.”

Nor do they seen much support from Fund managers buying CAD for the purposes of hedging:

“As foreign equities rally, the incentive for Canadian pensions to increase their currency hedging ratio drops.

“This removes a support for the CAD as they manage half of Canada’s foreign assets.”

Secondly they also argue that corporate currency hedging creates a mild upwards pressure on USD/CAD, due to a negative trade deficit.

Thirdly, “Canadian exporters had plenty of time to lock in much weaker CAD levels so that their month end demand should be weaker.”

Fourth, “Speculative positioning has been severely squeezed in USDCAD spot (Corax report) though shorts remain substantial in the CFTC.”

Fifth, If the Canadian Dollar rises much further the Bank of Canada may step in to weaken the currency due to the dire state of its (mainly oil) exports:

“Canada requires a weak currency for long as the economy slowly adapts to its post oil boom period.”

Finally, Deutsche see the rebound in the US as forcing the Fed to raise rates and this providing the catalyst for USD strength versus the Canadian Dollar going forward:

“Over the next few months, lower oil prices and decent wage growth in a somewhat tighter labor market should support the US economy.

“This should eventually give the Fed the ammunition it needs to slowly tighten monetary policy at a time when only half a rate hike is priced in for 2016."

Canadian Dollar Forecasts Updated

Deutsche Bank forecast the USD/CAD pair to fall to 1.3540 in the short-term where it will reverse and start moving higher, eventually regaining the 1.40 by Q1-Q2.

“Levels around 1.3540 or slightly below should then offer levels to build up longer-term USD/CAD positions targeting our 1.39/1.40 Q1/Q2 forecast,” say Deutsche.

However, the CAD still has the chance to advance in the near-term say Deutsche who see data in the next few days  being supportive of CAD longs:

“Canadian retail sales on Friday should give back some but not all of last month’s gains on lower car sales and gasoline prices, while core CPI stays tame.

“On the margin, the mix of surprises is likely to comfort the long CAD position and a continued short covering in USDCAD.

“As these probabilities shift so should USD/CAD rally back towards the 1.39/1.40 region of our Q1/Q2 forecast after basing in the 1.3540 region

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