CAD 1 – 3 Month Outlook
The end-Q3 USD/CAD target is revised to 1.03 from 1.05 prompted by persistent high oil prices and the BoC’s decision to leave rates unchanged. Strong portfolio inflows and the failure of a broad-based USD recovery further supported the revise.
Crude oil remains stubbornly high and momentum continues to favour higher rather than lower oil prices in the near-term. The crude oil forecast has been revised to US$100/bl in 2008 from US$88/bl. The 24-month forward curve has also jumped from U$$94 to US$137 within the last three months. If the oil-CAD relationship was as strong as in 2006, USD/CAD would probably have been trading well below parity, however concerns about the US and global economic outlook have diminished, but not eliminated, CAD’s petro status.
The BoC’s surprise decision and statement on June 10 saw rate expectations adjusting sharply upward. Market now sees official rates remaining flat throughout the remainder of 2008 at 3% (previously market was looking for rates to bottom at 2.75%). Also of note, BoC Governor Carney seems quite content with the current level of CAD, viewing the appreciation as a necessary adjustment to strong commodity prices. It seems like the new Governor has not only accepted the current level
of CAD, but would also welcome a stronger currency in the Bank’s fight against inflation if commodities continue to rise.
CAD 6 – 12 Month Outlook
USD/CAD is expected to end the year at 1.06 as the commodity rally runs out of steam. Continued sub-trend growth in the US spreading to the rest of the world and tighter monetary policy in many countries will limit the upside potential for commodity prices. However, a major downward correction is not expected given tight demand-supply conditions in most commodity markets. Market expects
the Fed, once it embarks on a tightening campaign in H2 2009, will be more aggressively than its
Canadian counterpart. A sharper than expected downward correction in commodity prices is an important upside risk to USD/CAD.
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