The CAD to USD exchange rate will stay near its current level for at least a year, according to a recent forecast from CIBC World Markets. The investment banking subsidiary predicts the Canadian dollar will not depreciate any further.
The forecast suggests a $0.70+ loonie in the March–June quarter, compared to the current $0.72–$0.73 range.
The Canadian dollar is expected to touch $0.735 by the end of the year, about $0.745 in the first quarter of 2017, and above $0.75 in mid-2017, CIBC said in its outlook titled “Loonie Has Seen Its Worst.”
One Canadian dollar currently buys $0.7278 U.S. dollars, based on Wednesday’s exchange rate. The loonie had hit a 13-year low of $0.6864 in January.
“It’s now likely that the loonie has seen the worst of the depreciation, even if it has one slight dip ahead,” said CIBC World Markets economists. (Source: “Canadian dollar has likely ‘seen its worst, CIBC says,” The Globe and Mail, February 24, 2016.)
The CIBC economists cited two reasons for their projection: oil prices and the U.S. Federal Reserve.
The economists forecast oil prices will bounce back this year, as demand increases: “That would provide at least a partial cover for the loonie from wider interest rate differentials.” (Source: Ibid.)
Oil prices have bottomed out, reaching $26.00 per barrel last month from their $114.00-per-barrel peak in mid-2014. U.S. crude is currently hovering between $30.00 and $32.00 per barrel.
The Fed will likely refrain from imposing most of its interest rate increases this year, which capital markets had predicted as recently as two months ago.
“Market volatility and a string of soft data has seen the [Fed] take a step back from their hiking cycle,” CIBC said in its forecast. (Source: Ibid.)
CIBC economists also expect that stimulus spending by the Justin Trudeau-led Canadian federal government will play into the value of the loonie. The budget, scheduled for March 22, may include billions of dollars for new infrastructure projects that are expected to spur economic growth in the coming years.
“The use of deficit spending by the Liberal government to stimulate the economy means that the pressure on the currency from potential monetary easing has been significantly reduced,” the bank’s forecast said. (Source: Ibid.)
CIBC’s economists were the latest in a number of economists revising their forecast for the Canadian dollar higher. Earlier this week, Fidelity fund manager David Wolf told Bloomberg, “we’re closer to the end than the beginning of the depreciation.” (Source: “Fidelity’s $40 Billion Money Manager Says Worst Over for Loonie,” Bloomberg, February 22, 2016.)