Loonie’s run may soon be behind us, CIBC warns

The Canadian dollar has enjoyed a stellar run this year against the U.S. dollar, but the currency may be approaching its limits, according to a new note by CIBC World Markets Inc.

“We could see another brief foray below 1.25 on dollar-Canada, but in terms of anything sustainable, the best days for Canada’s currency will soon be behind us, ” CIBC analysts wrote in a note to clients Wednesday.

The Canadian dollar wobbled overnight to 1.2575 against the greenback, after U.S. President Donald Trump said he will ‘probably’ cancel the North American Free Trade Agreement which his administration is currently re-negotiating with Canada and Mexico.

“Because we have been so badly taken advantage of. They have made such great deals — both of the countries, but in particular Mexico — that I don’t think we can make a deal,” the U.S. president said during a rally in Arizona on Tuesday night.

“So I think we’ ll end up probably terminating NAFTA at some point.”

The first round of NAFTA talks concluded in Washington last week, with two more rounds expected in Mexico and Canada in coming weeks.

“Greater loonie weakness would be in store if the NAFTA talks go badly, but the risks there seem larger for Mexico given Trump’s campaign focus on trade with America’s southern neighbour,” said CIBC.

The Mexican peso fell 0.7 per cent to 17.7843 per dollar overnight. The Canadian dollar was trading at 1.2560, and has jumped more than 10 per cent against the U.S. dollar this year, Bloomberg data shows.

The uncertainty around the trade talks will likely offset any traction the Canadian dollar may gain from higher oil prices, or an interest rate hike by the Bank of Canada.

The CIBC analysts are also skeptical the Bank of Canada will pull the trigger and ‘outgun’ the U.S. Federal Reserve on rate increases.

“While neither country has a pressing inflation problem, there are other Made-in-Canada reasons for the Bank of Canada’s tightening strategy to be very measured,” the analysts said. “Canadian household debt is larger relative to income and it isn’t locked into a 30-year fixed rate mortgage. A tightening in mortgage and other housing-related regulations is doing some of the work in cooling that sector.”

While Band of Canada Governor Stephen Poloz may opt for a rate hike in October, the bank will likely need to see more rate hikes south of the border before it takes further action.

Plus, the bank is also conscious of the perils of an expensive currency for an economy that depends heavily on trade.

“Look for dollar-Canada to trade within a range of 1.29-1.33 for most of 2018,” CIBC said.