Briefing highlights
- Rosenberg shifts view on Canadian dollar
- Loonie below 80 cents
- Markets at a glance
- EU, Canada settle beef-hormone dispute
Rosenberg on loonie
David Rosenberg has turned on the loonie.
"I was a bear on the Canadian dollar until this past spring, turned bullish in time for a 10-cent run-up against the greenback, but since turned agnostic," said the chief economist at Gluskin Sheff + Associates.
"Now it may be time to acknowledge that the loonie is now in a corrective phase," he added, noting the currency broke through what was then its 50-day average of 80.26 cents (U.S.) last week. Today, it stands at just below 80 cents.
Listed in a recent report as one of several things on "the worry list," Mr. Rosenberg noted the shifts in the factors that have moved the Canadian and U.S. dollars.
Remember that the loonie went on a tear when the Bank of Canada changed its tune last summer, first signalling an interest rate hike and then raising its benchmark twice, to now stand at 1 per cent.
Then, last week, Bank of Canada Governor Stephen Poloz took the loonie down a peg when he said the central bank's rate path isn't determined. And at the same time, the U.S. dollar rallied on its own.
Higher interest rates will, of course, attract money, thus moving the value of the currency in question.
"The BoC is sounding less hawkish and the [Federal Reserve] more hawkish," Mr. Rosenberg said.
"The U.S. government is looking to cut taxes while the Canadian government is seeking to raise taxes," he added.
"And the U.S. is taking a very tough stance on the NAFTA talks."
He also cited the recent U.S. preliminary duty against Bombardier Inc. as the Trump administration also goes after steel, aluminum and softwood lumber and panels.
Noting Mr. Poloz's warnings last week about global geopolitical and trade issues, Mr. Rosenberg summed it all up with this: "This does not spell [Canadian dollar] strength from here, at least over the near-term."
When you're looking for forecasts for the loonie, you want the most recent, like Mr. Rosenberg's, because they take into account the latest factors, such as what Mr. Poloz and Fed chair Janet Yellen had to say last week.
(Provided, of course, that the analyst in question turns out to be right.)
One of the freshest forecasts came just a few days ago from CIBC World Markets, which now projects the currency will end this year at just shy of 79.5 cents and next year at 77.5 cents.
"Markets had overreacted to the two rapid-fire interest rate increases from the Bank of Canada," CIBC economists said.
"But policy makers have begun to push back against those aggressive bets. Look for the bank to hit the pause button for at least the remainder of this year, pushing the [Canadian dollar] weaker in the coming quarters."
Other observers see the currency at stronger levels but their projections predate Mr. Poloz's latest comments.
And on that note, it used to be that the loonie fairly tracked oil prices, given Canada's reliance on resources.
Not so much any more.
"[Last] week's pullback in the Canadian dollar was especially notable since it came against the backdrop of underlying strength in oil prices," said Bank of Montreal chief economist Douglas Porter.
"In complete contrast to years of almost following crude to a T, the currency seems to have completely broken its tether with oil in recent months," he added.
"For example, in the four years from the start of 2013 until the dawn of this year, the Canadian dollar had a 0.95 correlation coefficient with [West Texas intermediate oil] on daily data. In 2017, the coefficient has not just faded, it has turned negative. In other words, the currency is more likely to weaken on any given day that oil is stronger, and vice-versa."
Mr. Porter doesn't believe that new trend is here to stay as Canada's economy is still so dependent on crude.
"Instead, it reflects one of those rare episodes where other currency-driving factors leap to the fore – i.e., relative monetary policies and relative growth rates, with NAFTA nervousness occasionally weighing in to boot," he said in a report.
"The shockingly upbeat performance by the Canadian economy in the first half of this year – and the Bank of Canada's forceful response – combined with some disappointment in U.S. growth, drove the currency against the grain of oil prices. In recent weeks, the roles have partly reversed: A July sag in Canadian GDP, a milder BoC message and a firm Fed."
Relative interest rates between Canada and the U.S. are now the "dominant driver" of the exchange rate, Mr. Porter said later.
"In fact, the Canada-U.S. two-year spread has been almost perfectly correlated with the currency this year. (That spread is always important, but it has been uniquely important this year.)"
- David Berman: Why the loonie took a sudden dive Wednesday
- The 12-penny divide: An extreme range of views on the loonie
- David Parkinson: Fed embarks on a tricky path back to normal
- ’Hawks in charge’ of Canadian dollar as U.S. dollar ‘unhinged’
- 14¢ later: Canadian dollar forecast to spike as high as 87¢ next year
- How Canada could end up with the G10’s highest interest rates
- Barrie McKenna, Rachelle Younglai: Bank of Canada, major lenders hike rates as economy roars
- David Parkinson: The beginning of runaway rate hikes? Don’t bet on it
Markets at a glance
Read more