Analysts at CIBC Capital Markets in Toronto have told clients they predict the Canadian Dollar should trade with a negative bias in 2017.

The call comes as the Canadian dollar is seen moving higher over recent months having caught a ride on the tailcoats of the US Dollar.

However, we heard from the Bank of Canada this month, that this strength in CAD is not welcome.

According to CIBC analyst Royce Mendes it was the appreciation versus non-US currencies that caught the Bank of Canada’s attention recently.

And it is against these other currencies in particular that CIBC argue recent gains won’t be sustainable.

“So it will come as some relief for frustrated policymakers that forthcoming headwinds are set to change the loonie’s trajectory against both the US Dollar and other currencies,” says Mendes.

Monetary Policy Divergence to Push USD/CAD Higher

But, the Canadian Dollar is tipped to be the only major currency to be unable to take advantage of this weakness.

With the Fed set to hike rates three times this year, higher rates south of the border will keep the Canadian Dollar under pressure.

The Bank of Canada is expected to maintain its dovish rhetoric and threaten to cut rates on signs of weakness.

Recurring mentions of both sluggish core inflation and the significant output gap are likely in the cards for upcoming policy statements which will likely keep the currency capped.

“The currency should reach 1.39 versus the US dollar in the third quarter. Our base case forecast incorporates only minor adjustments to cross-border trade with the US, but if the new President takes a more aggressive than expected stance versus Canada, the loonie could move materially weaker than that,” says Mendes.

In contrast to Canada, European policymakers are likely to begin signalling a less accommodative monetary policy stance later in 2017 (Eurozone tapering).

Japanese officials are already in the process of revising their growth forecasts higher for this year.

“All told, as the Bank of Canada holds steady on rates at least into the second half of 2018, the loonie will lose ground against a variety of currencies,” says Mendes.

Forecasts for the Canadian Dollar Against the Pound, Euro and US Dollar

The strength in GBP/CAD continues into the final quarter of 2017 when CIBC expect the rate to reach 1.74. The first quarter of 2018 sees 1.79.

The Euro to Canadian Dollar exchange rate is forecast to see a similar upside bias.

EUR/CAD is forecast at 1.39 in the first quarter 2017, 1.46 in the second quarter, 1.53 in the third and fourth and 1.57 in the first quarter of 2018.

The US Dollar to Canadian Dollar exchange rate is forecast to trade at 1.34 in the first quarter 2017, 1.36 in the second, 1.39 in the third and 1.37 in the fourth quarter.

The first quarter of 2018 sees the exchange rate at 1.38.