By Will Peters

The Canadian Dollar (CAD) has found a firmer footing in March, largely owing to a less dovish BoC. But, according to TD Securities' forecasts the CAD still has further to fall.

The Canadian dollar exchange rate complex is tipped to experience yet further weakness in 2014; this according to the March update to the 2014 exchange rate forecasts held at TD Securities.

However, early March sees stability in the Canadian currency with the Bank of Canada (BoC) showing an even hand towards managing expectations. With no sign of an imminent rate cut the CAD has strengthened:

Neverthelesss, the outlook remains CAD-negative, "USD/CAD has consolidated over the past month, the top out and reversal from the low 1.12 area late last month coincided more or less with our forecast upgrade for USD/CAD. We are not perturbed," says TD Securities analyst Cristian Maggio.

At Pound Sterling Live we note that the broader Canadian dollar exchange rate complex will likely be dictated to by the USD/CAD rate; trends here will likely feed into the pound / CAD rate, EUR/CAD etc.

The big problem for the Canadian currency at present appears to be the Bank of Canada who are feeding a dovish message to markets in response to weak domestic economic releases.

TD Securities don’t think there will be any backing off from the very dovish messaging that Governor Poloz introduced in January.

"Growth trends continue to be restrained by Canada’s weak trade performance and inflation is unlikely to pick up significantly from the low end of the bank’s target range anytime soon. A big rise in prices in the February month last year means that base effects will dampen price growth again this year after the slightly stronger than expected CPI data for January," says Maggio.

TD advise that they remain comfortable with their above consensus forecast profile for the US dollar vs Canadian dollar exchange rate through the balance of this year.

"We look for USDCAD to peak around 1.17/1.18 through the middle of the year before edging a little lower in H2. The median (Bloomberg) forecast calls for USD/CAD to remain little changed from current spot levels through the remainder of 2014," says Maggio.

Bank of Canada to weigh on Canadian Dollar

According to analysts at TD Securities the Bank of Canada will maintain an ever more dovish bent to interest rate expectations as a means to achieve a weaker currency.

"Canada needs to generate more inflation and stimulate growth where it has been most deficient and that has been in the export sector. A weak currency works toward both ends and given 75% of exports still go to the US the prospect of leveraging off stronger US growth prospects is now better than in recent years," says Maggio.

Additionally, the growth outlook is materially stronger in the US than in Canada, which will also support better performance from Canadian fixed income.

Turning to purely domestic factors, we expect the BoC will remain firmly on the sidelines this year. Moreover, given the direction that BoC communication has taken over the past 6-months we are inclined to believe that Poloz will continue to emphasise the downside risks to inflation over the next few meetings – though a further dovish shift looks less likely at this point.

"Hence, we expect the front-end of the curve to incorporate a mild easing bias for another quarter – whereas the Fed simply cannot threaten cuts any more," says Maggio.

Pound sterling vs Canadian dollar forecast

A look at the GBP/CAD outlook shows:

1 GBP will buy 1.84 CAD this quarter.

1 GBP will buy 1.87 CAD in mid year.

1 GBP will buy 1.83 CAD in the third quarter.

1 GBP will buy 1.82 CAD at year end.

Euro vs Canadian dollar forecast

1 EUR to 1.49 CAD quarter.

1 EUR to 1.49 CAD in mid year.

1 EUR to 1.43 CAD in the third quarter

1 EUR to 1.431.40 CAD at year end.