With a changing of the guard at the Bank of Canada, it is worth examining the outlooks for Canada’s currency and interest rates.
Private analyst Prairie Crop Chart recently did a technical consideration of the loonie’s relationship to the U.S. dollar. It noted that the medium term upward trend of the Canadian dollar has stopped and its value recently fell below a support line associated with dips going back to 2009.
If it continues to edge lower, there is the possibility that the loonie could significantly drop to a technical support line of about 85 cents US, said Prairie Crop Charts.
That would have a big positive impact on the price of prairie crops and livestock.
Prairie Crop Charts said there are lots of uncertainties in the global economy that could act as a catalyst for such a move.
However, Canada’s major banks don’t see the loonie falling below 95 cents.
CIBC’s monthly foreign exchange outlook published May 23 said it expected that the loonie would fall to 95 cents this year, but it is happening faster than the bank expected. Still, it expects “a soft landing for the loonie rather than an outright crash.”
CIBC sees the loonie hitting 95 cents in the third quarter of the year and then climbing back toward 98 cents by early 2014.
It sees parity by the third quarter of 2014, with the loonie edging above parity to about $1.02 by the end of that year.
It said the recent weakness in the Canadian dollar is mostly due to U.S. dollar strength as that country posts slightly stronger growth rates and Japan’s central bank implements a strong stimulus program, which is weakening the yen.
However, the CIBC says U.S. economic recovery by 2014 should increase Canadian exports and capital spending, causing the loonie to appreciate.
The actions of the Bank of Canada regarding interest rates have a big role in the value of the loonie.
Longtime bank governor Mark Carney is leaving to become the head of the Bank of England, and his successor is Stephen Poloz.
The Bank of Canada’s benchmark rate has been one percent since September 2010 in an attempt to fire up the economy. However, the low rate has also encouraged rising credit and a housing bubble that Carney has expressed a lot of concern about in the last year. The bank made it known that it would increase its rate if borrowing got out of hand. Carney’s message and new federal regulations regarding mortgages appear to have the problem under control.
As a result, there is little reason now to raise rates.
CIBC said that in Poloz’s previous role as head of Export Development Canada, he complained about the detrimental impact of a high dollar on exports. However, the bank doubts he will tailor his statements to “talk the dollar lower” now that he is the head of the Bank of Canada.
However, it’s possible the bank will stop talking about the possible need to raise rates in the near term and move to a neutral stance.
CIBC thinks improving employment levels in the United States might allow the Federal Reserve to raise rates by early 2015, with the Bank of Canada moving in tandem.
Here are the foreign exchange outlooks of some of the major Canadian banks.
Scotiabank Economics sees the loonie falling to about 96 cents US in the current second quarter, rising to about 98 cents in the second half of the year and reaching parity by the second quarter of 2014.
RBC sees the loonie falling to 95 cents in the third quarter, rising back to 97 cents by the first quarter of 2014 and then hitting 98 for the rest of that year.
BMO Capital Markets does not see much of a drop this year with the loonie at 97 to 98 cents until the fourth quarter when it will move toward parity and stay above the U.S. dollar through 2014.
But to note a contrarian, the Wall Street Journal’s Canada Real Time blog last week wrote that Clement Gignac, former chief economist at National Bank Financial, who won recognition for foreseeing the loonie’s rally in 2006-07, now thinks it could fall to 90 to 92 cents US in the next 12 to 18 months, with a chance at falling to the mid-80s in three to five years.
Gignac, who is now chief economist at Industrial Alliance Inc., an insurer, thinks the U.S. economy is picking up steam while Canada’s slackens. He believes that the commodities boom, which helped fuel Canadian growth and keep the loonie strong, is ending. That will keep downward pressure on the loonie, Gignac said.