Look for a 75-cent loonie when dol­lar comes off its ‘sugar high’

The Standard (St. Catharines) - - BUSINESS - GE­OFF ZOCHODNE gzo­chodne@postmedia.com Twit­ter: @ge­of­f­zo­chodne

The loonie may be in for some tur­bu­lence af­ter en­joy­ing sev­eral sweet months of suc­cess against the U.S. green­back, ac­cord­ing to some fore­casts.

The Cana­dian dol­lar fell be­low the 82-cent US mark on Thurs­day, tum­bling as far as 81.75 cents US as of mid­day. The dip fol­lowed an ap­prox­i­mately 13.5 per cent in­crease in the loonie’s value over the sum­mer, which pushed it past 82 cents US last week to a two-year high.

“Prob­a­bly the big­gest move we’ve seen for any­thing Cana­dian has been the loonie over the past sev­eral months, which has risen dra­mat­i­cally,” said Craig Fehr, Cana­dian in­vest­ment strate­gist at Ed­ward Jones, in an in­ter­view with the Fi­nan­cial Post. “I think it’s on a bit of a sugar high. And I think it’s prob­a­bly due to come back a lit­tle bit in the short term.”

Fehr said the sugar high stemmed from ex­pec­ta­tions of a slug­gish Cana­dian econ­omy and a sta­tion­ary Bank of Canada, as well as stronger eco­nomic ac­tiv­ity in the U.S. and a Fed­eral Re­serve that looked to be on a tight­en­ing cy­cle.

In­stead, the Cana­dian econ­omy has surged and the Bank of Canada has piv­oted to­wards a tight­en­ing cy­cle of its own. The cen­tral bank hiked its bench­mark rate by a quar­ter point in both July and Septem­ber, the first in­creases in about seven years.

“That wasn’t in the mar­ket at a 70-cent loonie,” noted Fehr.

A note from Cap­i­tal Eco­nom­ics said the Bank of Canada’s “un­ex­pect­edly ag­gres­sive mone­tary tight­en­ing this year, which stands in stark con­trast to the Fed’s over­cau­tious ap­proach, largely ex­plains the surge in the Cana­dian dol­lar this year.”

But what’s past may not be a pro­logue for the Cana­dian dol­lar.

“Af­ter end­ing this year at US $0.81, we ex­pect the Cana­dian dol­lar to fall back to US $0.75 by end-2018,” wrote Cap­i­tal econ­o­mist David Madani. “Over­all, the Cana­dian dol­lar has likely peaked this year and will fall back next year as a do­mes­tic slow­down forces the Bank of Canada to flip from hawk­ish to dovish, while ris­ing in­fla­tion will prompt the US Fed to flip from dovish to hawk­ish.”

Fehr said he ex­pects softer eco­nomic growth in the sec­ond half of 2017, which will co­in­cide with the Fed’s tough talk­ing ways.

“Which means that I think we prob­a­bly re­vert back a lit­tle bit,” said Fehr of the loonie. “And I think some­thing in the high-70s, maybe even mid-70s is prob­a­bly more ap­pro­pri­ate as that en­vi­ron­ment plays out.”

RBC Global As­set Man­age­ment said the Cana­dian econ­omy “has turned out to be the ‘lit­tle en­gine that could’” this year, in­clud­ing the 4.5 per cent rate of an­nu­al­ized eco­nomic growth it posted for the sec­ond quar­ter. The good eco­nomic news “fell onto the parched ground of ex­pec­ta­tions,” but Canada still faces head­winds on the hori­zon, RBC said, such as U.S. pro­tec­tion­ism and shale oil pro­duc­tion that can tamp down prices.

“We be­lieve that buy­ing the Cana­dian dol­lar at cur­rent lev­els be­cause BOC is hik­ing is like driv­ing a car look­ing only in the rearview mir­ror,” wrote Dag­mara Fi­jalkowski, head of global fixed in­come and cur­ren­cies at RBC Global As­set Man­age­ment. “What we should ask is: What’s ahead given that eco­nomic data sur­prises have been ratch­eted up, the cur­rency has strength­ened and the Trump ad­min­is­tra­tion has dis­ap­pointed?”

Fi­jalkowski said that “the cur­rent back­drop leads us to be­lieve the Cana­dian dol­lar will fall back to lev­els that com­pen­sate for Canada’s lack of com­pet­i­tive­ness, and that the cur­rency will have to re­main weak for some time.”

Fehr said an­other Bank of Canada rate hike can’t be taken off the ta­ble. How­ever, he added, avoid­ing an­other hike may be the safer move.

“Af­ter two rate hikes, I think it’d be more pru­dent for the Bank of Canada to take a pause and see what the ef­fects might be, par­tic­u­larly to con­sumers and to the hous­ing mar­ket, and to the loonie, quite frankly, be­cause with a higher loonie it’s sup­pres­sive of ex­port growth,” Fehr said.

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