- Canadian bank sees gains for CAD in 2021

- Update GBP/CAD, EUR/CAD and USD/CAD forecasts

- CAD set to benefit from commodities boom

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GBP/CAD spot at publication: 1.7407Bank transfer rates (indicative guide): 1.6798-1.6920Transfer specialist rates (indicative guide): 1.7017-1.7285Find out about specialist rates available to you, hereThe Canadian Dollar is forecast to appreciate in 2021 by economists at Canadian lender National Bank of Canada (NBC), who say gains in commodity prices will be a key driver of the gains.

The Canadian Dollar advanced 2.45% against the U.S. Dollar in 2020, however the currency was in fact one of the worst performing major currencies of the year, declining against the Euro, Pound Yen and all commodity-focussed currencies.

But, outperformance beckons according to a monthly foreign exchange forecast note from NBC.

"The Canadian dollar closed 2020 near a three-year high versus the U.S. dollar. Though loonie appreciation has been driven mainly by widespread weakness of the USD, we expect the next leg of its appreciation to be fuelled by commodity prices," says Stéfane Marion, Chief Economist & Strategist, National Bank of Canada in Montreal.

The implications of a Canada-specific driver as being a potential driver of Canadian Dollar gains suggests outperformance could stretch beyond the Dollar and emerge against those currencies it lost ground to over 2020.

Above: CAD relative performance over the course of the past year.

Research from NBC's economists say the Canadian Dollar is still undervalued, and that should investor focus turn towards Canadian fundamentals then the currency can move higher.

"Our model suggests that current fundamentals alone would have the CAD trading at less than $1.25 to the USD. In these circumstances there is no need for the Bank of Canada to lose sleep over the loonie’s recent strength," says Marion.

NBC note that the value of non-energy commodities being produced in Canada has risen to record highs, creating a potential fundamental windfall for the currency going forward.

NBC forecast the Pound-to-Canadian Dollar exchange rate to be at 1.72 by the end of January, 1.73 by the end of March, 1.71 by the end of June, 1.73 by the end of September and 1.67 at year-end.

The Euro-to-Canadian Dollar exchange rate is forecast at 1.56, 1.55, 1.56, 1.56 and 1.48 for the same period.

The U.S. Dollar-to-Canadian Dollar exchange rate is meanwhile forecast at 0.79, 0.78, 0.79, 0.80 and 0.83 for the same period.

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