We expect the CAD to depreciate further against the USD this year. USD/CAD is forecast to trade between 1.26 and 1.30 over the next few quarters before declining back to 1.20 late in 2016.
This is important for the economic outlook, as the expected pickup in Canadian net exports reflects both stronger demand growth from the US and more competitive Canadian exports due to the weaker CAD.
Our forecast reflects the impact of oil prices and growth differentials, and thus the rate spreads between the currency pair.
For the last decade or so, CAD offered a way for investors to make bets on the direction of global oil prices. In addition, uncertainty over the strength of the rebound in Canadian growth will likely keep the BoC on the side lines for some time as the Fed begins rate normalisation later this year.
This expected policy divergence should keep USD/CAD well supported until the BoC begins to normalise policy – perhaps in late 2016.
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