Tweeter-in-chief could blow away predicted rise in loonie
Higher oil prices and interest rates are likely pending economic volatility from the U.S.
Your shopping money should probably buy a little bit more south of the border next year — but don’t count on it.
Most forecasters expect the loonie to rise against the U.S. dollar in 2019, driven by higher oil prices and interest-rate hikes by the Bank of Canada.
Those predictions, however, could be blown off course by a tweet storm or two from the White House.
Whether it’s a tweet about oil, Middle East politics or a trade war with China, having Donald Trump pounding out policy 280 characters at a time can make predicting economic trends a little bit harder than usual, said George Davis, the chief currency strategist at RBC.
“It definitely creates a lot of volatility. The U.S. is the biggest economy in the world,” Davis said. “You never know when these tweets are coming.”
The average forecast of 71 predictions tracked by Bloomberg News is for the loonie to end 2019 at 78.13 cents (U.S.), up almost five cents from where it is now. The highest forecast is 84.75 cents, while the lowest is 74.07. The loonie closed 2018 at 73.30 cents, a drop of 6.41 cents on the year.
Davis, whose RBC currency team is calling for the loonie to end 2019 at 75.19 cents, says its biggest driver is almost always the spread between Canadian and U.S. government bond yields, followed by the price of oil. On the former, it’s for the simple reason that people are always looking for an extra edge in their investment portfolio.
“If there’s a spread in the yields, people put their money where yields are higher, and that drives the currency,” explained David.
The yield is how much money an investor would make on a bond over time. If a bond is held until maturity, the yield is the same as the interest rate the bond was issued at. But the vast majority of bonds are bought and sold on the secondary market (i.e., partway through their term), where the price fluctuates. Typically, when a central bank raises interest rates, that pushes a country’s bond yields higher.
And in his crystal ball, Davis sees the Bank of Canada bumping its key overnight lending rate twice in 2019, but likely not till the second and third quarters. That’s later than he originally predicted. Typically, the BoC boosts rates when it’s trying to cool an overheated economy. But there has been some mixed news on economic statistics lately, which means they’ll likely hold off for the first quarter of next year, Davis suggested.
Economic volatility around the globe can also create a “riskoff” environment, which typically hits the loonie harder, he added. So, too, does the price of oil. Much of the dollar’s roughly five-cent drop in 2018 has come since the fall, when the price of oil was also falling.
That drop in oil came largely because the world’s oil inventory has gone above a key fiveyear average, said James L. Williams, a veteran energy economist based in Arkansas.
In several decades of analyzing oil and gas prices, he says the most reliable indicator for where oil prices are going is whether or not the total inventory (i.e., stuff that’s out of the ground, waiting to be shipped) held by countries in the Organization for Economic Cooperation and Development is above or below a five-year average.
Right now, says Williams, it’s roughly 79 million barrels above the average. That means there’s a glut of oil and lower prices (the price of the West Texas Intermediate bench- mark has dropped to $45.88 on Dec. 20 since October from $75 U.S. per barrel).
That glut is something the OPEC oil producing cartel, including Saudi Arabia, would like to rectify by cutting production. Lower supply, in turn, means prices rise, he said.
While historically OPEC has struggled to enforce production cuts, it’s had more luck in recent years, he said, predicting the price of crude will rise in 2019. But it won’t be a straight line.
“This will be a jagged year. There’s a strong likelihood that it will get to $60. But it could easily drop to $40 first,” said Williams.
Economic uncertainty, difficulty enforcing production cuts, and tweets from Trump could make for a volatile mix. There’s already, in fact, some evidence that the tweeter-in-chief moved oil prices — likely in deliberate fashion.
“I think his tweets had an impact on the Saudis and Russia. They both increased production, and that dropped oil and prices at the pump before the midterm elections.
“It was a little better for him, but not that much,” said Williams of the U.S. elections, which saw Democrats increase their share of the U.S. representatives by 40 seats.
Still, he said all forecasts must be taken with a grain of salt, no matter how well-researched.
“When I give talks about oil forecasting, I tell people three things. Don’t give a specific date for a price. If you forecast wrong, forecast often. And if you do forecast right, make sure you tell everyone about it,” Williams said with a chuckle.