LOONIE COULD FALL TO US71.4¢, RBC SAYS, IF ACCELERATED FED RATE HIKES TO HOLD.

The Royal Bank of Canada expects the loonie to fall to US71.4 cents from about US74 cents by the end of year as the Bank of Canada’s interest rate continues to lag behind that of the U. S. Federal Reserve.

The Fed will most likely raise its interest rate 0.25 per cent this month and again in the fourth quarter to reflect a strengthening U. S. economy after years of monetary stimulus, said RBC senior economist Nathan Janzen.

Meanwhile, RBC expects the Bank of Canada to keep its rate frozen at an abnormally low 0.5 per cent for the rest of 2017, despite hawkish indications from the Bank’s senior deputy governor Carolyn Wilkins.

Though the central bank has acknowledged the Canadian economy “is doing better, ( it) is also looking at wages and the inflation rate and seeing them both generally underperforming,” RBC deputy chief economist Dawn Desjardins said. “With NAFTA renegotiations and changes to the American corporate tax rate, that may present challenges to Canadian companies.”

She concluded from this the Bank is “not in the place to move the rate but, as we head into 2018 ( should growth continue and trade stabilize), they will remove some of that stimulus that won’t be needed anymore.” RBC expects the rate to freeze until 2018, when it will gradually rise to 1.25 per cent by end of year.

Though RBC says it expects oil prices to rise, the rise won’t be fast enough to stop the loonie’s depreciation.

Higher rates in the United States increase the demand for U. S. dollars relative to Canadian dollars.

Historically, the divergent monetary approaches are an oddity. “Typically, US and Canadian monetary policy doesn’t diverge because our economic cycles tend to be very closely aligned. We’re seeing a different trend now because Canada is so reliant on oil and that was hit by a shock despite the U. S. economy still growing. That economic divergence is historically unusual and you get an unusual monetary response,” Janzen said.

On Monday, however, Wilkins said the Bank of Canada was encouraged by broadening economic strength — which saw gains spread across 70 per cent of industries — something Canada hasn’t seen since before the oil-price collapse, nearly three years ago.

“As growth continues and, ideally, broadens further, (the Bank’s) governing council will be assessing whether all the considerable monetary policy stimulus presently in place is still required,” Wilkins said in a speech delivered at the Asper School of Business in Winnipeg.

Janzen said indications the Bank of Canada is assessing a rate hike may slow the loonie’s depreciation but there’s little sign so far it will keep pace with the Federal Reserve’s.