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Canadian dollar still on death row despite 'stay of execution' on tariffs

Briefing highlights

  • How the loonie could fare
  • Markets at a glance
  • OECD tweaks Canadian outlook
  • Trump blocks Broadcom takeover of Qualcomm
  • U.S. inflation cools in February

Whither the loonie

The Canadian dollar is still on death row despite the "stay of execution" from the Trump administration.

It can still win on appeal, as it were. But at this point, currency analysts are wary.

The loonie won some support after the U.S. government exempted Canada and Mexico from its planned tariffs of 25 per cent on steel imports and 10 per cent on aluminum.

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But that exemption rests on the successful renegotiation of the North American free-trade agreement. If it all collapses, the loonie does, too.

Also a factor is how aggressively the Bank of Canada raises interest rates, particularly compared to the Federal Reserve. Of course, the uncertainty over trade is also an issue there.

Currency analysts have different forecasts for the Canadian dollar, a wide range that would put the loonie as low as 74 US cents.

Others see a much higher value, but with a cautionary note attached.

"From a strategy standpoint, the disconnect between the ramp-up in decibel levels around trade conflict and the lack of a commensurate market response has a whiff of complacency about it and continues to support our cautious outlook in [foreign exchange]," said Arindam Sandilya of JPMorgan Chase.

"CAD is probably the G10 currency most exposed to deterioration in the trade climate given Canada's extreme trade footprint with the U.S. and the room for depricing of 50 basis points of BoC hikes currently discounted for 2018," he added in a report, referring to the currency by its symbol.

"Canada's exemption from import duties has granted it a temporary stay of execution, however we keep the loonie on our watch list as a potential short and await better entry levels."

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As it stands now, JPMorgan's forecasts put the Canadian dollar 82.6 US cents by mid-2018 and about 84 US cents by the end of the year.

Bank of Montreal, in turn, projects the loonie will average 78.1 cents in the second quarter, and 79.9 cents in the fourth.

Royal Bank of Canada's forecast suggests about 79 US cents around mid-2018 and 82 US cents at the end of the year.

RBC also expects the Bank of Canada to raise its benchmark overnight rate, now at 1.25 per cent, three more times this year, which would affect the currency's value. Other observers see one or two rate hikes.

"The heightened uncertainty revolving around trade looks set to linger as the seventh round of NAFTA negotiations ended without much progress on controversial issues like rules of origin and government procurement," said RBC technical strategist George Davis.

"While no formal dates have been set for the eighth round, talks are expected to resume in Washington in early April," he added.

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"As such, while our anticipated rebound in USD/CAD has exceeded our Q1 forecast of 1.28, we are going to maintain this forecast until we get more clarity on trade matters."

By that, he means the U.S. versus the Canadian dollar, and the loonie at 78 US cents in the current quarter.

Then there's David Madani, chief Canada economist at Capital Economics, who expects no further rate increases this year, and possibly even a cut.

"All things considered, we expect the Canadian dollar to come under greater downward pressure, ending this year at around 74 US cents," Mr. Madani said.

"Furthermore, we would also expect the S&P/TSX to underperform, despite lower interest rates," he added.

"High household debt, deflating home valuations and sluggish nominal wage growth are likely to lead to disappointing corporate earnings in the coming quarters, reinforcing the downward pressure on the loonie."

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Markets at a glance


OECD tweaks outlook

The Organization for Economic Co-operation and Development has tweaked its outlook for Canada, warning again about the country's housing market.

In its interim outlook, the group now projects Canada's economy will expand by 2.2 per cent this year and 2 per cent in 2019. In each case, the forecast is up 0.1 of a percentage point.

"Macroeconomic policies are gradually becoming less accommodative, but private consumption remains robust, strong employment growth is beginning to be reflected in wages, and firmer commodity prices should boost business investment, the OECD said.

This came with the usual warning, which the country has heard from many groups, about the housing market that policy makers have been moving forcefully to tame.

"Further corrections in asset prices remain possible as monetary policy normalizes, given the still-high valuations in some markets, including equity markets in the United States, housing markets in Canada and Australia, and corporate bonds."

The OECD also forecast that the global economy will expand 3.9 per cent in each of the next two years, with the U.S. looking at growth of 2.9 and 2.8 per cent.

Tapping new hiring pools key to growing economy without sparking inflation: Poloz

Bank of Canada Governor Stephen Poloz says tapping new pools of workers, including women and new immigrants, would allow Canada's economy to keep growing without sparking inflation.

Boosting the participation rate of women, new immigrants, youth, indigenous people and the disabled would add roughly half a million workers to Canada's labour market, Mr. Poloz said in a speech at Queen's University in Kingston, Ont., The Globe and Mail's Barrie McKenna reports.

"The bank has concluded that there remains a degree of untapped potential in the economy," Mr. Poloz said. "It means Canada may be able to have more economic growth, a larger economy, and therefore more income per person, without generating higher inflation."

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