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How low can the Canadian dollar go? ‘We don’t expect much relief for the ailing loonie’

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Outlook for the loonie

Mark McCormick believes the Canadian dollar could soon sink further to about 74 US cents.

Paul Ashworth is counting on 75, but warns it could topple to below 70 depending on how the fast-moving trade wars play out.

David Rosenberg, too, warns of potential trouble for the loonie.

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Those are just three of the recent views of a currency caught up in the Trump administration’s protectionist push, and in the difference in outlook for interest rates in Canada and the U.S.

Where the latter is concerned, the dollar lost steam late last week when Statistics Canada reported a tamer-than-expected annual inflation rate of 2.2 per cent for May - still above the Bank of Canada’s target but nothing that would force a loonie-friendly interest rate hike next month.

The latest measure of retail sales was lame, as well.

This week, the focus will shift to Friday’s reading of economic performance in May and, more importantly, to the Bank of Canada’s business outlook survey, something the central bank relies on as it plots ahead.

“The near-term outlook for the Canadian dollar just became that much more clouded after [Friday] morning’s pair of consumer price and retail sales data,” said Mr. Rosenberg, the chief economist at Gluskin Sheff + Associates.

“The impact on Bank of Canada policy is obvious as market-based odds of a July hike have been pared from what recently was a sure thing to a coin toss currently,” he added.

“Meanwhile, the [Federal Reserve] is on autopilot and set to raise rates another five times through 2019 unless something breaks along the way.”

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You’ve also got to watch for Donald Trump’s Twitter feed, said Mr. McCormick, North American head of foreign exchange strategy at TD Securities, referring to the Canada-U.S. trade war and the president’s broader protectionist agenda.

The U.S. has already hit Canada with tariffs on steel and aluminum, and Ottawa’s countermeasures are set to come into effect July 1. The administration is also threatening levies on imported autos, and, to top it off, negotiations to overhaul the North American free-trade agreement are going nowhere fast.

“Trade tensions and NAFTA tape bombs are the fastest-growing risks, leaving the loonie sensitive to the stick shock from Trump’s Twitter account,” Mr. McCormick said in a report.

Mr. Ashworth, in turn, the chief North America economist at Capital Economics, said he still expects the loonie to end this year at 75 US cents, slipping to 70 by late next year.

But “a significant escalation of trade tensions with the U.S. would accelerate the currency’s decline, and there is a risk it could fall to well below 70 cents,” he said.

In a separate report this week, Mr. Rosenberg noted that Canada has yet to feel the full measure of the trade warnings. So, potentially, get ready for more.

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“If the White House ends up putting on those 25-per-cent duties on automotive imports, that, along with the spinoff effects, will easily drain a percentage point off of Canadian growth at a time when it is running little better than that pace as it is – making a recession a possible threat,” he said.

“Along the way, the uncertainty alone will dampen capital spending, as has already been the case.”

These effects are playing out in the bond market, as well. As Bank of Montreal noted, yields on 10-year Canadian government bonds have declined, for a four-year high of about 2.5 per cent one month ago.

“Amid widespread weakness in equities, on the growing realization that trade tensions are quite real, 10s fell below 2.1 per cent, matching the lows last seen at the start of this year,” said BMO chief economist Douglas Porter, noting the yield was below that May inflation reading of 2.2 per cent and just above the Bank of Canada’s preferred, so-called core measures.

“One doesn’t need to venture all the way back into the Paleozoic era (i.e., pre-2000) to find a period when real bond yields were north of +400 basis points,” Mr. Porter said.

“The only episodes when long bond yields have been lower than core inflation in the past 60 years were: 1) 2015/16, following the oil shock, and 2) 1974/75, following a different kind of oil shock (when inflation spiked faster than yields),” he observed.

“The point is: negative real bond yields are not normal, but we are testing that zone again.”

So watch closely for what the Trump administration says this week, and what the Bank of Canada business outlook survey suggests.

“Any shift in sentiment could spook the BoC, further impacting the market’s confidence on a July hike,” said TD’s Mr. McCormick, referring to the survey.

“We don’t expect much relief for the ailing loonie,” he added, projecting the currency could well slip to just above 74 US cents “in the near future.”

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