Friday, November 20, 2015

USDCAD to depreciate slightly to 1.34 levels - Nomura

FXStreet (Delhi) – Charles St-Arnaud, Research Analyst at Nomura, suggests that with oil prices remaining low and the rate differential turning in favour of USD, we think USD/CAD is likely to depreciate slightly going into the end of the year, reaching a level of 1.34.

Key Quotes

“On monetary policy, it is now clear that the Bank of Canada is no longer considering cutting its policy rate further, unless another negative shock affects the economy.”

“The rebound in growth in Q3 and the resilience of the labour market is likely to provide some comfort to the BoC on the outlook. However, most of the rebound is due to an increase in oil production as some projects started production over the period, suggesting that underlying momentum remains weak. Moreover, we continue to believe that exports are likely to underperform the BoC’s forecast, as a result of the lack of competitiveness of the Canadian non-energy sector.”

“The election of the Liberal government in the October federal election means that fiscal policy is likely to be looser over the coming years, as the party pledged to invest in infrastructure. We should get the details of the size of the fiscal expansion in the Fiscal Update, likely to be released in early December. This creates a more favourable policy mix where further monetary policy stimulus is no longer needed unless growth slows sharply.”

“In terms of valuation, based on the recent level of commodity prices, we estimate that the current fair value for USD/CAD is around 1.31. This means that USD/CAD is not undervalued at the current level, suggesting that any further move higher is likely to be contained and likely to result mainly from the rates differential, unless commodity prices decline further.”

“Oil prices are expected to remain contained in the coming months because of the high level of inventories around the world. Nevertheless, some adjustment in supply and an improvement in demand are likely to keep oil prices from falling meaningfully below $40 a barrel for a prolonged period. However, we believe that a pick-up is also unlikely and think that oil is likely to trade between $45 and $50 a barrel for most of 2016, before rising toward $60 a barrel in 2017.”

“This small depreciation is likely to continue somewhat in 2016, as further hikes by the Federal Reserve widen the rates differential, pushing USD/CAD to 1.36 by end-2016.”
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