Friday , August 12 2022

The TD Bank predicts that the moon will fall to 71 percent in the US, because the outlook for the Canadian dollar is "significantly" changing


The strong start of the year for the Canadian dollar – an increase of 3.5 percent against the dollar in the first two months after nearly eight percent of last year's fall – many wondered if it was the year when the moon would return to return.

However, since the beginning of March, the Canadian dollar has fallen by 1.3 percent against the US dollar, as prospects for the Canadian economy are also obscured.

Gross domestic product (GDP) declined by 0.1% in January, after deeper than expected slowdown in the second half of last year.

TD Securities strategists say the Canadian economy has a "real problem in its hands," which will lead to a widespread weakness for the forward-looking currency.

They predict that the moon will spend most of this year ranging from $ 1.35 to $ 1.40 for Canadian dollars to buy one US dollar. In other words, this means that it could be reduced to 71 cents per US dollar. That's more than five percent of the current 75 cents level.

"The outlook for the Canadian dollar has grown considerably in the medium term, which is the result of a poor report on GDP in the fourth quarter, and the Canadian Canadian Bank is back with a drawing of what it's wrong to do," said Mazen Issa. , a senior foreign exchange strategist in TD securities, in a note on Friday.

"Frankly speaking, the Canadian dollar has uniquely established itself as a" troubled child "in the G10. Positive ones are hard to find."

Issa thinks that the Bank of Canada is now at the end of its cycle of tightening after five interest rate increases since mid-2017. If the central bank starts with rates this year, Issa says this is likely to be a downgrade.

"This dynamics should keep the US dollar – Canadian dollar [cross] elevated through the differential interest rate channels – especially considering our view that the Fed has yet another move to deliver, "Issa said, suggesting another interest rate rise from the US Federal Reserve would further strengthen the US dollar.

The probability of an increase in interest rates from the Bank of Canada is at least zero percent in the next six months, according to trading in investments known as Swap Indices overnight.

"As long as the Canadian dollar is a price taken from global factors, the Bank [of Canada] can no longer ignore the fact that current domestic demand is now reduced by two quarters (with the fourth quarter -1.5 percent), Issa said.

"Last time it happened in 2015. Then the economy registered a technical recession and the bank provided" insurance cuts "due to a collapse in oil prices."

Oil and fool

But until now, the reference price of US oil – Vest Tekas Intermediate (VTI) – has jumped nearly 29 percent thanks to a reduction in production from the Organization of Oil Exporting Countries (OPEC) and Canadian energy producers.

However, Stephen Brovn, a senior Canadian economist at Capital Economics, predicts another drop in oil prices, and a sluggish salary growth is the reason this year will drop to 72 cents in the US this year.

"We do not expect the recovery of oil prices to be maintained," said Brovn. "Due to the combination of weak global demand and the likely increase in production in the US, we see that the VTI is reduced to $ 45 a year later."

"Although the decline in production in Alberta has proven effective in raising Canadian oil prices in relation to the US, rail transport is not financially viable at current low discounts."

In the meantime, Bipan Rai, head of the North American foreign exchange strategy at CIBC Capital Markets, is also betting on the fall of the Canadian dollar, although he expects a correlation of the currency with oil prices.

"As we have said many times in the past, the correlation of crude oil in Canada is barely stable," says Rai in remarks. "We expect the relationship to weaken in the near future."

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