GBP/CAD forecasts from NatWest, Morgan StanleyUSD/CAD forecasts show CAD outperformanceAs oil prices provides supportAs does the Bank of Canada

Above: File image of Tiff Macklem with Finance Minister and Deputy Prime Minister Chrystia Freeland. Image source: Bank of Canada.

A combination of steady rate hikes at the Bank of Canada and elevated oil prices keep a number of foreign exchange strategists we follow bullish on the Canadian Dollar's outlook.

The calls come amidst a period of elevated oil and commodity prices which are set to boost Canada's terms of trade at the same time the economy continues to print stronger than expected domestic economic data releases.

"We remain bullish CAD," says Brian Daingerfield, Head of G10 FX Strategy, U.S., at NatWest Markets.

The Bank of Canada raised interest rates for the first time in the current normalisation cycle on March 02, and NatWest Markets says the the Bank of Canada's guidance continues to guide towards further interest rate hikes.

"We think the BoC is likely to continue on this steady path for the foreseeable future, including each of its remaining meetings in 2022," says Daingerfield.

Rising interest rates should support the yield paid on Canadian bonds, which in turn offers international investors a compelling reason to inject their capital into Canada, thereby supporting the domestic currency in the process.

Above: GBP/CAD at daily intervals.

Reference rates at publication:

GBP to CAD spot: 1.6689High street bank rates (indicative): 1.6105 - 1.6222Payment specialist rates (indicative: 1.6540 - 1.6689Find out about specialist rates and service, hereSet up an exchange rate alert, hereAnalysts at Morgan Stanley meanwhile tell clients investors are underpricing the likelihood of a 50bp hike at the Bank of Canada in April, an outcome that would prove particularly 'hawkish' for CAD.

"In the dollar bloc, CAD remains our preferred expression of a benign global outlook, elevated energy prices, central bank hawkishness, and local robust data," says David Adams, Head of North America G10 FX Strategy at Morgan Stanley.

The Canadian Dollar was boosted this week after Canadian inflation figures surprised market expectations again in February.

Canada’s inflation rate climbed by one percent during February when consensus among economists had suggested a smaller 0.9% increase was likely, which was enough to lift the annual rate of price growth from 5.1% to 5.7% and made for the largest increase since August 1991.

But it was last week's employment data that served a notice to foreign currency markets that the Canadian Dollar was underpinned by an economy in rude health when employment figures for February trounced all market expectations.

Statistics Canada said the economy added 337k jobs in February, which was almost three times a market consensus that had looked for a roughly 132k increase.

This is an outcome that could potentially encourage the Bank of Canada to feel more comfortable in lifting its base interest rate in the months ahead.

Image courtesy of NatWest Markets.

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Energy market dynamics that are also proving a compelling narrative for buying Canadian Dollars with currency strategists.

The war in Ukraine has injected significant upside volatility into oil prices, thereby raising the terms of trade advantage of currencies belonging to energy exporters, such as Canada.

"There is expected to be a massive transfer of wealth from energy importers to energy exporters in the period ahead. This is the theme that’s dominating FX at the moment," says Bipan Rai, North America Head, FX Strategy at CIBC Capital Markets.

Brent crude spiked to a high of $136 / barrel on March 06, before paring the advance back to $100 at the time of writing, which still represents a multi-year high.

"We think commodity FX and safe havens should remain supported if the geopolitical situation remains volatile," says a weekly currency market briefing from Barclays.

"For economies that are geographically and economically more removed from the conflict, the impact is purely inflationary and signals further tightening. Hence, AUD, NZD, CAD and NOK may get double supports from the solid commodity prices and relatively hawkish monetary policies, relative to European G10 FX," adds Barclays.

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NatWest Markets eyes Canada's exposure to higher energy prices as an increasingly positive driver for the currency.

However Daingerfield cautions that high oil prices can complicate the outlook as while they are a benefit to the Canadian Dollar they are also a hinderance to global growth.

The Canadian Dollar is a pro cyclical currency by nature that tends to appreciate in economic upswings. An energy induced global slowdown is therefore a potential drag on its valuation.

"The surge in energy prices is a negative for global growth, complicating traditional “oil / risk / CAD” correlations," says Daingerfield.

Nevertheless strategists at NatWest think the positive input oil prices present can win out over time.

Morgan Stanley hold a similar stance. "CAD remains our preferred expression of a benign global outlook, elevated energy prices, central bank hawkishness, and local robust data," says Adams.

"We expect continued CAD gains. CAD has historically traded closely in line with oil prices – particularly long-dated Brent futures – and we expect the recent rise to pass through to a stronger CAD," he adds.

NatWest Markets are forecasting the U.S. Dollar to Canadian Dollar exchange rate (USD/CAD) to be at 1.20 by the end of the second quarter right through to year end.

They forecast the Pound to Canadian Dollar exchange rate to be at 1.64 for this horizon.

Morgan Stanley forecast USD/CAD rate to be at 1.24 by the end of the second quarter, 1.20 by the end of the third quarter and 1.16 by the end of the year.

Although the Canadian Dollar is seen strengthening it nevertheless represents an upgrade from previous forecasts for 1.19, 1.16 and 1.12 respectively as analysts see the Dollar proving more resilient over coming months.

The investment bank's forecasts for the Pound-Dollar rate are 1.30, 1.32 and 1.34 for the same period, giving a GBP/CAD forecast profile of ~1.6120, ~1.58 and ~1.5545.