ABN Amro's leading foreign exchange analyst has told his clients he has become more bearish on the Canadian dollar’s outlook.

Update: CAD higher as employment data beats estimates. Canadian employment increased by 6.6K people, ahead of estimates for 5K.

Roy Teo, Senior FX Strategist at ABN Amro, has cited a plethora of factors that have lead him to believe the Canadian dollar exchange rate complex will fall further than he had previously thought.

Teo was ranked by Bloomberg as the most accurate forecaster for Asian currencies for several quarters in 2014 and 2015.

Other currencies that he has ranked in the top 3 include the Australian dollar, New Zealand dollar and Canadian dollar.

The downgrade to the Canadian dollar comes as the currency continues to struggle in the global FX landscape.

The Canadian Dollar Will Fall Further

The Canadian economy is slowing down; indeed it is even teetering on recession.

Economic growth in May slowed more than expected to 0.5% yoy, the slowest pace since December 2009.

Underpinning much of the economy’s under-performance is the drastic decline in commodity prices – Canada is a key oil exporter and 2015 has been very unkind to those countries that rely on high oil prices.

ABN Amro are less optimistic on the recovery in oil prices as highlighted in their recent Energy Monitor.

“The WCS has plunged by almost 70% since June last year compared to 25% decline in the CAD. Though the trade deficit narrowed in June, we expect it to widen again as the fall in energy exports value outweigh the recovery in non-energy exports,” says Teo.

Since the Bank of Canada (BoC) lowered the overnight lending rate by 25bp on 15 July, the Western Canada select (WCS) crude oil price (benchmark price for heavy oil produced in Alberta) has dropped by another 25% and is at the lowest level since early 2009.

Consumer confidence is expected to deteriorate further, resulting in weaker retail spending.

“We expect the BoC to cut interest rates by 25bp in the next monetary policy meeting on 9 September,” says Teo.

This is to provide further insurance to the economy ahead of elections on 19 October and is arguably not fully priced in by financial markets.

“We have become more bearish on the Canadian dollar (CAD) and now expect it to decline further towards 1.36 against the USD later this year,” says Teo.

Previously the forecast rate was at 1.32.

Canada Creates More Jobs, But Weakness Seen Behind the Headline Figures

Canada’s July employment saw 6600 new jobs being created, unemployment remains at 6.8%. The 6.6 increase was ahead of estimates for an increase of 5000.

According to analyst Matthieu Arseneau at NBF Economics and Strategy the report looks fine on the surface but a closer look reveals some weaknesses:

“The overall increase was entirely due to self-employment with paid employment down a massive 34K, the worst drop in a year.

“Full time employment was also down sharply but note that the pullback follow an outsized gain of 65K in June.

“Also disappointing are declines in cyclical sectors like manufacturing and construction. Western provinces continue to struggle in light of the oil shock.”

However - Arseneau suggests the picture is better when looking at the more-reliable longer-term trend.

Year-to-date job gains average a decent 15K/month, with Central Canada and British Columbia offsetting weakness on the oil patch (Alberta, Saskatchewan, and Newfoundland/Labrador).

So far this year, public sector related jobs represents 2/3 of job gains while goods-producing industries are posting a cumulative loss of 50K (middle chart).

“Despite this month’s drop, total hours worked remain in an upward trend (bottom chart) which support our view that Canada is set for a rebound in economic activity as soon as Q3,” says Arseneau.