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The year ahead is going to get nasty for the loonie Add to ...

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The following is an excerpt from Scott Barlow’s collection of 10 charts that will define the markets in 2017. To view the entire series, click here.

The Bank of Canada and the U.S. Federal Reserve are moving in different directions and this is likely to result in a lower Canadian dollar for 2017.

The price of oil has a significant impact on the loonie but interest rates have been the better predictor of the domestic currency’s value in the past five years. Specifically, the yield on the Canadian two-year government bond minus the yield on the two-year U.S. Treasury bond has been almost foolproof as a fair value indicator for the Canadian dollar, as the chart below shows.

The extent to which Canadian bond yields follow U.S. yields higher will be an important theme for 2017. Historically, domestic yields have followed U.S. yields even during periods when the Canadian economy did not justify any change. In bond trader parlance, Canada is a ‘yield taker’ country. Any change in Canadian yields relative to U.S. bonds will likely have a significant effect on the value of the domestic currency.

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