"Once risk aversion and the rapid flow into US dollar denominated assets subside, the outlook for CAD should brighten" - Camilla Sutton at Scotiabank.
The prospects for the Canadian dollar (Currency:CAD) have deteriorated in the short-term according to an FX forecast note from Scotiabank.
However, as we move into the second half of the year the CAD is expected to strengthen. (Please visit our IMT site for the latest global FX forecasts, access granted free via this Facebook entrance page).
"The broader Scotiabank macro-forecast has been revised to include a downward adjustment to both China’s and India’s growth outlook, as well as an ongoing deterioration in the situation in Europe. Accordingly, the near-term outlook for CAD has also been revised lower," advises Camilla Sutton at Scotiabank.
The Canadian dollar is expected to fall towards the end of the current quarter, CAD-USD is expected to reach 0.95.
But, in the medium-term CAD should prove a favoured currency and rally into year-end.
"Once risk aversion and the rapid flow into US dollar denominated assets subside, the outlook for CAD should brighten. The medium term interest rate outlook favours CAD as the Bank of Canada is likely to hike interest rates long before the Fed, the ECB or the BoJ, who all face more significant domestic headwinds," says the note.
Canada’s triple-A status and developed bond market should keep global flows strong as investors use Canada as a diversification destination away from the more volatile Europe.
"To sum up, the outlook has deteriorated, particularly in the near-term; however the traditional drivers of CAD remain strong enough to generate a rally once risk aversion subsides, pushing CAD to close the year above parity to 1.01 (or USD-CAD at 0.99)," says Sutton.