Light seen at end of tunnel for Loonie after rebound during roller-coaster day
Analysts project rally on the horizon amid Canada’s steady economic outlook
The Canadian dollar briefly slipped below US75 cents for the first time since June on Wednesday before rapidly gaining more than half a cent after the U.S. Federal Reserve struck a dovish tone on interest rates.
The roller-coaster of a day, which saw the loonie touch a low of US74.85 cents before rallying to as much as US75.51 cents, put an end to a weeklong slump in the Canadian currency.
Analysts had blamed the loonie’s woes on uncertainty over the global economic slowdown — which had sent investors to the safe haven of the U.S. dollar — as well as historically low prices for Canadian oil, which often move hand-in-hand with the currency.
But that was before Fed chairman Jerome Powell on Wednesday said that U.S. interest rates were “just below the broad range of estimates of the level that would be neutral for the economy.”
Powell’s softer tone — and the implication that significant U.S. rate hikes may not be on the horizon — sent the value of the U.S. dollar crashing.
“It’s been pretty quick and brutal,” said Scotiabank chief FX strategist Shawn Osbourne.
The greenback has been on a “tremendous run” over the past two months, Osbourne said. Since October, the U.S. dollar has risen by 3.74 per cent. Now, Canada’s currency could be set for a rally.
“(The loonie) looks a little bit stretched, a little bit oversold and possibly, a little bit cheap,” Osbourne said. “It’s not impossible … that we actually see a bounce here.”
Despite the negative headwinds, the loonie has actually been quite resilient, according to National Bank of Canada analyst Krishen Rangasamy.
The two factors that most strongly drive its price, he said, are oil prices and interest rate spreads. The last time Western Canada Select prices were this low (in November, oil traded for an average of US$17.64) and interest rate spreads between the U.S. and Canada were as wide — 60 basis points — was in January 2016. At that time, the loonie plunged to US68 cents.
The difference between now and then, Rangasamy said, is that then the economic outlook was “gloomy.” Hikes weren’t on the Bank of Canada’s schedule and it was instead talking about negative interest rates.
“Now you have the USMCA deal that is signed, you have a more hawkish Bank of Canada which is telling you that they’re thinking about hiking rates, the housing market seems to be OK,” he said. “It’s a totally different picture to what we had back in 2016.”
Despite projections of a global slowdown, Canada’s economic outlook remains steady and it’s one of the only countries, according to a recent Organization for Economic Cooperation and Development report, set to see its GDP growth rise in 2019.
For now, the economy is chugging along — but its ability to continue to do so is dependant on a resolution to the U.S.-China trade war, which Rangasamy expects will happen. In the event that he’s wrong, he offered a warning: If trade tensions escalate, everything changes and the National Bank of Canada’s forecast that the loonie will rise over the next few quarters no longer stands.
Scotia bank’s current forecast still has the loonie hitting US78 cents by the end of the year, though Osbourne said the recent dip means it is no longer likely to happen.
The loonie, however, could still receive several boosts before yearend. The USMCA trade deal could be signed at the G20 Summit in Argentina this week, which would almost certainly buoy the currency, Osbourne said.
Another boost could come from OPEC deciding to cut its output by one million barrels per day, which would help address the oversupply problem leading to Canada’s cheaper prices.
With good news on the horizon, investors should not be worried about the loonie, BMO Capital Markets senior economist Robert Kavcic said. Although there’s still downside risk in the short-term, Kavcic said he expects the loonie to close between US74 and 78 cents as oil prices rebound before the end of the year.
“It’s pretty clear we are late in the expansion,” Kavcic said. “You can argue if it’s the 7th, the 8th or the top of the 9th inning ... but it’s not panic time yet.”