Exchange Bank of Canada analyst questions reliability of Export Development Canada’s prediction of US$0.76 dollar
Export Development Canada is taking flak for its forecast calling for a softer loonie in 2021, which would be good news for exporters of agricultural products.
EDC is forecasting an average value of US$0.76 for the year, down a few cents from where it was trading on Feb. 11.
Erik Bregar, head of foreign exchange strategy with Exchange Bank of Canada, doesn’t put much faith in long-range forecasts and doesn’t understand the utility of attempting to calculate an annual average value.
“I’m a firm believer of trading what’s in front of you and right now for the Canadian dollar, it’s in a clear uptrend and I don’t see any reason for that to change right now,” he said.
Peter Hall, chief economist with EDC, said there are plenty of people who put too much weight on what has happened in the past to help guide them on what the future holds.
“We’ve just had to develop a thick skin on that over time, and by and large our calls have been right,” he said.
Hall said the loonie has been propped up in part by a weakening U.S. dollar. The U.S. Dollar Index as of Feb. 11, 2021, was down 12 percent from last year’s high set on March 20, 2020.
“There has been a softening of the U.S. dollar that we don’t think is going to persist,” he said.
The U.S. dollar is still the only viable option for investors looking for a reserve currency that will hold its value over time. That will eventually result in a rebound in the U.S. dollar.
“Bottom feeders can’t resist piling into it ultimately,” said Hall.
That will put downward pressure on the loonie.
The loonie is also highly influenced by oil and gas prices. He thinks the nascent jump in oil prices will be short-lived because it is being artificially supported by Saudi Arabia’s supply constraints that won’t last.
“These short-term prices just aren’t supported and we feel the same about the base metals,” said Hall.
Bregar said the loonie is being supported by rising stock markets, sound monetary policy and higher energy prices.
“It’s not that complicated,” he said.
The loonie was trading at US$0.79 as of Feb. 11. For it to drop to $0.76, everything would have to unravel.
The stock market and oil prices would have to tumble due to something like another bad phase of COVID. But he doesn’t anticipate any market shock like that on the horizon.
Oil prices are up $6 per barrel since the beginning of February, said Bregar.
Andrea Gardella, senior economist with the EDC, said the loonie worked against farmers for the most part of 2020.
It started the year at about $0.75, dipped as low as $0.69 in March due to plummeting oil prices and the slumping COVID-19 economy, and has since been on a steady climb to $0.79.
Fortunately, other market factors more than offset the impact of the strengthening dollar in the second half of 2020.
Prices for a number of agriculture products soared, resulting in robust exports. For instance, canola prices appreciated 10 percent throughout the year.
So while total exports for the three prairie provinces declined by 16 percent in 2020, shipments of agriculture and agri-food products went up 19 percent.
“You can see there’s two distinctive stories happening here,” said Gardella.
Saskatchewan in particular benefitted from surging COVID-19 food demand and improved access to rail cars. Agricultural exports in that province reached $17 billion in 2020, a 31 percent increase over the previous year.
By contrast, Saskatchewan’s oil exports fell by 32 percent.
“The agriculture story is one that has really stood out. It stood out in 2020 and it’s going to continue to stand out in 2021,” she said.
The market continues to be “very friendly” to exporters of agriculture products with strong demand and export quotas and tariffs in competing countries keeping prices high.
Inventories of a number of agricultural commodities will be low heading into 2021-22, and Gardella expects another strong sales program.
There will likely be some softening in commodity prices in the upcoming crop year, but prices should still be strong and the weakening Canadian dollar will help.
“You’re still going to see exporters selling as much as they can,” she said.
The one wrinkle is the continuing container shortage. China does not want to wait for containers to be filled for the return trip. About nine percent of all of Canada’s grain exports are shipped overseas in the metal boxes.
“That’s one thing we are watching that could slow down exports, particularly in (quarter) one of 2021,” said Gardella.
She expects the container shortage issue to be resolved later this year when economies stabilize and trade gets back to normal.