Scotiabank have updated clients with their latest exchange rate forecasts for 2015 and 2016.

For the Canadian dollar exchange rate complex (CAD) three main drivers will continue to dictate direction:

oil prices;BoC and Fed policy developments;the broad USD move.The economic backdrop underpinning the Canadian dollar has deteriorated amidst the much-publicised fall in oil prices.

The decline in oil has seen a predictable decline on the economy and in turn the value of the CAD against its major trading partners, with an exception being the euro:

The pound to Canadian dollar exchange rate (GBPCAD) started the year at 1.8053 and is now at 1.8685.

The euro to Canadian dollar (EURCAD) started the year at 1.4136 and is now at 1.3554.

The US to Canadian dollar (USDCAD) started the year at 1.1777 and now finds itself at 1.2689.

Please note, that all currency quotes mentioned above refer to the wholesale market. Your bank will affix a discretionary spread when transferring money internationally. However, an independent provider will seek to undercut your bank's offer, thereby delivering up to 5% more currency in some instances. Please learn more.

Forecasting More Weakness, But…

Can oil prices continue to decline? Yes, of course, and many in the industry are predicting further weakness.

However, the distance left to travel lower is diminished and what we can be sure of is that the scope for downside is limited.

As such we see the prospects for an oil-inspired CAD depreciation being similarly diminished.

In line with this, analyst Camilla Sutton at Scotiabank says the bulk of CAD depreciation has likely occurred, but nevertheless she expects further weakness to materialize before year-end.

Much of the softer outlook facing the Canadian currency will actually stem from the decision-making at the Bank of Canada (BoC) says Sutton:

“Central bank policy has shifted towards data dependency, increasing the importance of employment and inflation releases.

“The Fed is expected to enter a hiking cycle, while the BoC is expected to maintain low rates and eventually succumb to a second interest rate cut.

“From the BoC’s perspective, the impact of lower oil prices, a large employment gap, low inflation, and extreme uncertainty is concerning.

“The divergence in policy is driving a financial market reaction, with a weakening in CAD and driving the US-CDN 2-year bond yield spread into positive territory.”

The prospect of more CAD-negative interest rate cuts at the BoC therefore remains a distinct possibility.

International Players are Exiting Canada

With a softer economic profile forecast for the remainder of 2015 we note that global investors are selling CAD.

The importance of global flows is the main driver of exchange rate levels at the current time, as this graphic explains.

Sentiment towards CAD has deteriorated in tandem with the deterioration in the fundamental picture.

At the end of February, the CFTC was reporting a stable short position; while consensus expectations was for ongoing CAD weakness.

(The CFTC keeps an eye on speculative market players – this gives us invaluable insight into sentiment towards various financial assets).

Scotiabank have cited evidence of foreigners selling Canadian fixed income and equity securities, generating a net CAD outflow from capital markets.

“Accordingly, CAD is expected to depreciate into year-end; we hold an end of year target of 0.75 (or in USDCAD terms 1.33),” says Sutton.

The forecast for the euro to Canadian dollar however sees the EURCAD at 1.40 by the year end as the European currency will remain pressured by actions at the European Central Bank.

No figures have been issued for the GBPCAD.