USD/CAD currency pair our forecast is 1.27 for the Q3

David Tulk, Chief Canada Macro Strategist at Toronto Dominion Bank, on Canadian economy

In light of the collapse in oil prices, Canada is relying on a resurgent US economy to provide a boost to exports and spur investment in activities that are not related to commodities. Lofty oil prices have helped foster investment and employment growth in Canada as well as domestic consumption by making imports less expensive. However, with the price of oil falling recently, the pressure is on for Canada and it does not look like the country will be getting much help from its Southern neighbor. Do you agree with this and what development do you expect from the Canadian economy?

I think the issue is that as much as oil prices have stabilized, they are still obviously well below the level we saw this time last year. As a consequence, that is going to keep business investment quite subdued as companies there are cautious about investing in this environment. It does put more emphasis on the non-energy side of the economy to do well, and there we look at the strength of the United States. The US economy has obviously struggled in 2015 and, the longer these struggles remain in place, the more difficult it is for the non-energy sector in Canada to compensate for ongoing weakness in energy. Thus, we anticipate that the Q1 will be fairly weak and we are cautious about expecting too much optimism in Q2 and beyond.

Economists have moved up the forecasts for when they anticipate growth will be strong enough to warrant the central bank to increase interest rates. They see Governor Poloz raising the benchmark rate by the middle of next year, compared with the forecasts a month ago that had him waiting until the end of 2016, according to median estimates of Bloomberg surveys. Do you agree with these economists and what outcomes for Canadian economy do you expect to see in case of the rate hike?

I believe the Bank of Canada will be very circumspect about hiking interest rates in this environment. As a consequence, we suppose that the bank will wait until the Q4 of 2016 before hiking. That is consistent with a slow growth environment in the United States as well as in Canada. The hike's impact on the economy would obviously be to strengthen the currency and slow down the housing market. The housing market it is an area that probably should be grown at a slightly slower rate because of the issues with rising leverage. However, to weaken or to strengthen the currency is productive from the perspective that exports are still required to drive the Canadian recovery.

A lot of economists see further pressure being put on the Canadian dollar driving it as low as 73 cents by the end of the year. Do you agree with them and how do you think the situation in Canada will influence the Loonie performance further?

I think the recent strength in Canadian currency is only going back over the last couple of weeks in this environment. It has been driven by some of the strength in the price of oil, as well as by the Bank of Canada which has sounded a little bit more optimistic. We would still see this as in environment where the Canadian Dollar needs to weaken further. I think that is driven at the same time by the growing US Dollar strength as we get further into the year and the US data starts to look a little bit better. Moreover, the Bank of Canada sounding quite cautious also puts some more weakness into the Canadian Dollar. We are still looking that, by the end of the year, the Canadian Dollar will be a lot lower than where it is today.

What are your forecasts for USD/CAD and EUR/CAD for Q3 and for the end of this year?

For the USD/CAD currency pair our forecast is 1.27 for the Q3 and 1.30 for the end of the year. Talking about the EUR/CAD, by the end of Q3 we see it touching 1.266, and for the longer time perspective we forecast the currency pair to be at 1.247 levels.