Traders predict uptick of loonie versus U.S. buck
There’s a lot more to our dollar than just oil these days.
The industry is less critical than it once was to the nation’s prospects, enabling some Canadian dollar bulls to look past the recent slide in domestic crude prices and focus instead on the outlook for economic growth and the prospect of higher interest rates.
The price of Western Canada Select, or WCS, a blend that represents about half the country’s crude exports, has plummeted even as global benchmarks such as West Texas Intermediate have risen.
Yet analysts continue to predict gains for the loonie, with the median forecast in a Bloomberg survey showing it appreciating to $1.25 per dollar by the end of next year from current levels around $1.30.
“Good economic conditions in Canada are leading toward ongoing tightening by the Bank of Canada,” said Greg Anderson, head of foreign-exchange strategy at Bank of Montreal, who expects the Canadian dollar to strengthen to about $1.27 over the next three months.
While the price of WCS is trading close to its widest discount to WTI on record, the world’s 11th largest economy is running near its potential and the unemployment rate has fallen to around 5.9 per cent as other sectors such as technology boom. Businesses see their sales outlook improving, according to the Bank of Canada’s survey conducted last month. And that was even before the government cemented a deal on the North American Free Trade Agreement, which had been a source of considerable uncertainty.
The fixed-income market is currently pricing in about four increases over the coming year for the BOC’s benchmark, which currently stands at 1.5 per cent. The odds of an increase at next week’s meeting have climbed to around 84 per cent and economists surveyed by Bloomberg predict it will rise to 1.75 per cent, the highest in a decade.
Oil prices are no longer a good proxy for Canadian currency trends, in part because the local energy sector isn’t receiving the kinds of foreign investment it used to, according to Bank of Montreal’s Anderson.
Government data show that oil and gas accounts for around 15 per cent of the foreign stock of investments in Canada. That’s down from about 17 per cent in 2014, before a decline in oil prices triggered a swath of restructuring across the industry.
The correlation between the loonie and WCS was strong as recently as 2016, before falling off, according to data compiled by Bloomberg. The correlation was strong even for most of 2015 as well, when a sharp decline of oil prices triggered an outflow of investment in Canadian energy industry.
That said, energy products — including oil — do still account for a significant chunk of the nation’s exports, so it certainly can’t be ignored by central bankers. It’s something that the Bank of Canada may point to as a reason to insist on pursuing a gradual tightening path, according to Andrew Kelvin, senior Canada rates strategist at TD Securities.
There is also potential for energy to recover some of its influence on the currency further down the track with the development of the $40 billion liquefied natural gas project on the coast of British Columbia.