Loonie is flying high but will it rise much higher?

The Canadian crop market digested several things last week, including a rapidly rising loonie and rapid harvest progress.


Rain expected this week across the Prairies should give many farmers a chance to take a breather after going all out for the previous few weeks.


The rapid advance of the harvest in mostly dry conditions put downward pressure on markets, especially as word trickled in that yields in some areas were coming in better than expected.


And then the Bank of Canada decided not to hold off on interest rates until October as many expected, but to lift its benchmark interest rate by 25 basis points to one percent.


The Canadian economy is performing well, growing faster than other countries in the G7, and appears to no longer need the stimulus of lower rates that the bank brought in to counter the negative effect of weak crude prices and oil industry activity.


The August jobs report that was also released last week showed stronger than expected hiring, although mostly in part-time work. The strong economic and jobs reports had market watchers speculating that the central bank might increase rates by another 25 points at its December meeting.


That put Canadian bond returns above their American counterparts and put upward pressure on the Canadian dollar, which climbed above US82 cents, up 12 percent since May and the highest level since the spring of 2015.


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Could the dollar go higher?


Scotia Bank forecasts that the loonie will average US85 cents in the first half of 2018.


That would be bad news for Canada’s crop and livestock producers because a rising loonie weakens on-farm returns.


However, a Reuters poll of more than 40 foreign exchange strategists this week shows a less aggressive tone. The median forecast of the poll showed the loonie backing off recent highs to about 80.5 cents by the end of the current year.


The loonie’s rising value this summer has been also affected by weakness in the U.S. dollar. 


It has drifted down against most currencies as early optimism about the U.S. President Donald Trump administration’s promises of tax reform and infrastructure spending has bogged down.


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After raising rates earlier this year, many analysts think the U.S. central bank, the Federal Reserve, might be taking a more cautious approach because American economic growth could be hurt by recent hurricanes.


However, there is always the potential for it to raise its interest rate again this year, which would put momentum back in the U.S. dollar’s court.


Also, if the North American Free Trade Agreement renegotiations start to go badly for Canada, that would also deflate the loonie. 


As well, if the overheated housing sectors in Canada’s largest cities turn into a bust, it would stop the Bank of Canada’s rate increases and send the loonie back down.


We wish we could make clear and simple forecasts about the loonie’s direction, but there are too many unknown factors.


However, it would likely be safe to say that the average value of the loonie in the 2017-18 crop year will be higher than it was in 2016-17.


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