2013 Canadian dollar forecast
A short-term compromise on the US fiscal cliff is CAD-positive, but remaining political uncertainty over the US debt ceiling and sequester would likely to limit its upside in the near term. Once we see resolution, the currency is expected to return to a gradual appreciation trend on the back of robust outlook for oil prices (WTI) and a modest pick-up in the US economy in 2013. In addition, we expect international investors hunting for high-quality fixed income assets and natural resources to continue to purchase Canadian assets, which is medium-term CAD supportive.
However, Canada growth is expected to remain only modest and the Bank of Canada is in no rush to hike with its eyes on the Fed. Taken together with modest currency overvaluation, we expect the pace of appreciation to be rather gradual. Household indebtedness and the domestic housing market remain the biggest domestic risk. We expect a moderation in housing activity over 2013 due to macro prudential measures introduced by the government, but a housing price correction would be orderly and manageable, rather than a collapse, with any negative effect offset by an accommodative monetary policy stance and resilient domestic labour market conditions.
TD Securities have advised that they are downgrading their forecasts for CAD in 2013:
"The Bank of Canada’s more dovish shift recently has put the prospect of rate hikes even more distant over the horizon. So while diminished global event risks led us to trim our outlook for CAD weakness in the first part of the year, this ‘low for longer’ message from the Bank suggests there are some downside risks to our forecast."
The bank say they forecast parity for the USD/CAD exchange rates for the first half of the year with a break below parity around September, and a move to 0.97 come December.