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Briefing highlights

  • Seven views of the Canadian dollar
  • Stocks, oil at a glance
  • Eldorado Resorts, Caesars to merge
  • Required Reading

Where’s the loonie headed?

The Canadian dollar kicks off a new week after an impressive few days that suggest bears “have thrown in the towel”.

Those gains came as oil prices rallied and, notably, the Federal Reserve signalled lower interest rates are on the way, pressuring the U.S. dollar.

"Finally, the CAD has started – started, mind – to catch up with fundamental developments," Bank of Nova Scotia chief foreign exchange strategist Shaun Osborne and his colleague Eric Theoret said in a report, referring to the loonie by its symbol.

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"We have highlighted a number of CAD-positive factors in recent weeks – from relatively better data, to sharply narrower U.S.-Canada spreads, clear improvements in CAD sentiment and positioning through to a significant turn in USDCAD technical signals – but been left bemused by the CAD’s inability to take any real advantage," Mr. Osborne and Mr. Theoret added.

“All of these factors [remained last] week but it was confirmation of the dovish shift in the Fed’s policy stance which triggered broader pressure on the USD, some notable gains in the CAD through mid-week and finally suggests that CAD bears have thrown in the towel.”

Federal Reserve chair Jerome Powell

Kevin Lamarque/Reuters

Here, then, are some views of the loonie, and where it could be headed, from comments over the past several days:

Kit Juckes, Société Générale

"When I go to Canada, the country ‘feels’ cheap, from my morning coffee to my evening dinner. The OECD’s measure of [purchasing power parity] is at USD/CAD 1.25, and you might have thought that if PPP was going to be relevant anywhere, it would be for two developed economies joined by a long land border and a lot of trade. However, with oil prices far below their highs, the housing boom far in the past and the Bank of Canada having adopted a significantly less hawkish policy stance than the Federal Reserve, the loonie has simply remained cheap against the dollar."

That purchasing power parity of 1.25 means a Canadian dollar at 80 US cents.

“There are too many reasons to be gloomy about the Canadian dollar to forecast a sharp appreciation, and our forecast essentially looks for it to underperform others as the U.S. dollar finally corrects in the face of a slowing economy.”

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Mr. Juckes, global fixed income strategist, projected the loonie would be at slightly over 75 US cents by December, just shy of 76 by next March, and almost 77 by June, 2020.

"The threats facing the Canadian dollar include the impact on the domestic economy of the housing market slowdown, the impact of a slowing Chinese economy, the threat of continued trade tensions, even within North America, and, indeed, the danger that oil prices drift lower as global growth slows. On the positive side, most of that is already in the price. Notably, the loonie has lagged the bounce in oil prices. It has also done less well than shifts in relative yields/rates would tend to suggest. On that basis, alone, the downside for the currency is pretty limited from here."

Mr. Osborne, Mr. Theoret, Scotiabank

"If recent trends are any guide, it may still take some time for investors to fully embrace the upside potential in the CAD. Positioning and sentiment is perhaps only neutral now, rather than outright bullish."

Indeed, the loonie's gains last week still seem somewhat "light" given the bounce in oil prices and narrower spreads between the yields on two-year U.S. and Canadian bonds, they said.

“Fundamentally, we have to think that there is more downside in the USD from here (and very limited upside potential). We look for minor USD rebounds to remain capped in the mid/upper 1.32s and look for more losses towards 1.30 over the next one to two weeks.”

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Their 1.32 would mean a Canadian dollar at 75.8 US cents, and mid to upper would mean mid to lower for the loonie, while 1.30 would put the currency at almost 77.

Stephen Brown, Capital Economics

The Bank of Canada under governor Stephen Poloz will have “mixed feelings” about the suddenly stronger currency, said Mr. Brown, senior Canada economist at Capital Economics.

"A stronger loonie would make life even harder for exporters, however, at a time when GDP growth south of the border is already slowing. That would be an issue for Poloz, who has argued that Canada needs stronger business investment and export growth for the economy to successfully wean itself off an over-reliance on the housing market for growth."

Bank of Canada senior deputy governor Carolyn Wilkins and governor Stephen Poloz

Sean Kilpatrick/The Canadian Press

Like other observers, Mr. Brown projected the Fed will cut interest rates. That, he added, will "increase the likelihood" that the Bank of Canada also cuts, a move less friendly for the loonie.

Taylor Rochwerg, CIBC World Markets

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"We’re now calling for two cuts by the Fed in the coming months. While the Bank of Canada is in no hurry to act, it rarely fails to follow the Fed, and we look for one rate cut by the BoC in Q2 2020. While markets are likely overpriced for the Fed cuts, the reality of the Fed cutting while the BoC remains on hold should see the loonie appreciate in [the second half of] this year, with USDCAD falling to 1.31 in Q4."

That 1.31 would put the Canadian dollar at just below 76.5 US cents.

Ms. Rochwerg, analyst at CIBC, said she expects the loonie to gain in the short term amid stronger economic growth for the second and third quarters, then sink again as growth slows in the last three months of this year and into next.

"Even if trade tensions ease, a slowing in global growth and the near-term appreciation in the Canadian dollar will keep a lid on business investment and exports. The Bank of Canada has once again placed a lot of weight on both to be drivers of growth in 2020 and beyond, and could be disappointed once more. Such disappointment will drive a rate cut by the BoC next year, which would put downside pressure on the loonie again and see USDCAD reach 1.38 by the end of next year."

Which would mean a Canadian dollar at 72.5 US cents as 2020 closes out.

Daniel Hui, Paul Meggyesi, Meera Chandan, Sally Auld, JPMorgan Chase

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In their just-released mid-year outlook, Mr. Hui, global foreign exchange strategist, and his colleagues forecast the Canadian dollar at about 74 US cents in the fourth quarter of this year, and just above 74.5 in the second quarter of 2020.

“CAD remains at a crossroads. Below-trend growth and an output gap conflict with the booming labour market and solid inflation outcomes. Meanwhile, trade relations remain a wildcard with [the United States-Mexico-Canada Agreement] yet unresolved and concerns over the U.S.-China trade war still outstanding and [the G20 summit coming up this week]. Furthermore, the U.S. appears to be slowing and looks poised to cut rates multiple times this year, with rates markets priced even more aggressively, which has narrowed U.S.-Canada spreads to extreme levels. Yet we expect the BoC to cut later this year, as well.

"The uncertain combination of competing forces makes for a currency that has decoupled with its traditional short-term drivers – especially rate spreads – and instead reflects a significant risk premium to its underlying fundamentals ... Ultimately, though, we struggle to see CAD appreciating in the context of a deteriorating global macro environment, especially when its key trade partner is contributing to much of that slowing.”

Sal Guatieri, BMO Nesbitt Burns

"With [last] week’s lift, the loonie has already breached our year-end call of $1.32. Will it take flight? Well, if by flight one means getting off the ground à la the Wright Brothers in 1903, then yes. The U.S. interest-rate landscape has shifted enough to warrant a firmer loonie. But, if one means cruising at 30,000 feet, then probably no ... The fact that the country is still running a large trade deficit, despite a low-valued currency that has stayed north of [Statistics Canada's] estimate of purchasing power parity of around $1.30 for the better part of a year, speaks to a loss of competitiveness. A recent upturn in U.S. labour productivity has widened the gap in unit labour costs further in its favour. So, while the loonie might have caught a gust of wind, it’s probably still pretty firmly tethered to Earth."

That 1.32 projection from the BMO senior economist translates to 75.8 US cents, and 1.30 to almost 77.

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Bipan Rai, Sarah Ying, CIBC World Markets

“No, the Fed hasn’t cut yet. Still, there is an inherent fallacy in promoting CAD strength over the long-term because the Fed is expected to ease. The two economies are still linked, and if the Fed is easing, the odds are likely that the BoC will follow at some point too. Indeed, the time to price in BoC cuts will come, and with it weakness in the CAD. The time may not be now, but if history is any indication, don’t expect an extended run lower in USD/CAD once the Fed starts easing.”

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Ticker

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