Trump stance on trade to keep loonie under pressure

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Canadians became used to their dollar rising and falling in lockstep with oil markets as the energy sector's economic might grew.

Now, the loonie could use some of the momentum building in global crude-oil prices. Instead, fears about anti-trade moves emerging in Washington and rising U.S. interest rates have forecasters calling for weakness for the Canadian dollar in 2017.

Numerous projections call for a gradual slide into the low-70-cent (U.S.) range, or lower by around midyear, with gains in oil prices preventing an even steeper drop. The loonie was worth 74.4 cents on Friday, having climbed from 71 cents a year ago, when crude prices were skidding to multiyear lows.

The paramount threat to the trade- and commodity-influenced currency is U.S. president-elect Donald Trump's pledge to, at a minimum, renegotiate the North American free-trade agreement. J.P. Morgan said a best-case fallback scenario in U.S. policy would be a return to the U.S.-Canada free-trade agreement in place before NAFTA came into force in 1994.

"But given the significant footprint of U.S.-Canada trade for the Canadian economy, not just in final exports and imports, but in the significant cross-border nature of supply chains, even a small disruption could have a significant impact," the U.S. bank said. It predicts the loonie will dip under 70 cents in the first half of 2017.

Bank of Nova Scotia sees a low of 71 cents in the second quarter, while Canadian Imperial Bank of Commerce projects the loonie to bottom out at 71.9 cents in the third quarter.

Indeed, in the North American context, the Mexican peso has been hit much harder since the U.S. election in November, sinking 13 per cent because of worries about Mr. Trump ripping up NAFTA and relations worsening between the two neighbours after Mexico became a punching bag for the president-elect during the campaign.

Trade uncertainty will keep pressure on the Canadian dollar, too, but so will a diverging interest-rate policy between the U.S. Federal Reserve and the Bank of Canada. Canada's central bank has signalled that it won't soon follow the fed in raising its official rate, as the domestic economy is not as close to capacity as in the United States.

The landscape is shaping up this way, according to Scotiabank: Sluggish but steady economic growth, tempered gains in oil prices and little prospect for rate hikes until late 2018, none of which are slam-dunk negatives for the Canadian dollar.

"But against a backdrop of rising U.S. interest rates, a strengthening U.S. economy and the anticipation of president-elect Trump delivering a pro-growth policy suite, these factors will do nothing to protect the Canadian dollar from an appreciating U.S. dollar," the bank said.