Farmers can count on a weak Canadian dollar continuing to offset low commodity prices, according to a senior bank economist.
But a grain market analyst thinks the expected U.S. interest rate hike won’t materialize, which would lead to a stronger loonie.
The recent rally of the loonie was an anomaly, said Shaun Osborne, chief foreign exchange strategist with Scotiabank.
The Canadian dollar closed last week at US77.5 cents, up about three cents from the end of September.
“We’re viewing this rebound in the Canadian dollar as something that’s really just a temporary phenomenon and something that’s likely to correct in the next few weeks,” said Osborne.
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The recovery in the loonie is a direct reflection of the recent weakness in the U.S. dollar.
“Investors have suddenly got cold feet about the (U.S.) Federal Reserve being able or willing to raise interest rates on the kind of timeline many people expected,” he said.
The market had factored in a 50 percent probability that the Fed would hike interest rates before the end of the year to manage the economic expansion and keep inflation in check. It recently dropped that probability to 30 percent, which has put downward pressure on the U.S. dollar.
It is also battered by the slowdown in the global economy because of problems in emerging markets such as China and Brazil.
Osborne said all the issues that led to a faltering Canadian dollar are still there. The Canadian economy is underperforming, commodity prices are still depressed and the Bank of Canada is keeping interest rates where they are.
Scotiabank is unwavering in its belief that the Fed will do as it has been hinting and raise interest rates before the end of 2015.
“We’d certainly concede that the probability is a bit less than we thought maybe a month or two ago, but it’s still our base case and we’re not changing our view at the moment,” said Osborne.
Rising U.S. interest rates would pull more investor money into U.S. treasury bonds, bolstering the U.S. dollar and depressing competing currencies.
“We’re still forecasting a Canadian dollar ending the year at 73 cents, so quite a bit off of where we are right now,” he said.
Others are not so sure.
Errol Anderson, grain market analyst with ProMarket Wire, believes the U.S. is teetering on recession.
“The U.S. economy is really showing signs of slowing in the retail consumerism sector,” he said, noting that Walmart’s share price fell 12 percent last week.
“I think the Walmart situation is just proof in the pudding that the middle class is struggling right now, and it’s truer than any government report.”
Anderson sees continued weakness in the U.S. currency, which will prop up the Canadian dollar.
That is bad for Canadian farmers because the weak loonie has been a buffer against slumping commodity prices, most of which are priced in U.S. dollars.
“If the U.S. starts to go into a recession, crude oil could be towards $60 a barrel and the Canadian dollar could be above 80 cents again,” he said.
Osborne believes the U.S. economy is not heading for another recession. It has been in a growth phase for only a couple of years following a long recovery from the severe recession of 2008-09.
A typical business cycle would see the growth phase last four to six years, so any recession is likely a couple of years away.
The U.S. economy slowed a bit in the third quarter, but it is still clipping along at an impressive growth rate. Unemployment rates are low and declining.
“It’s one of the longest continuous expansions we’ve had in decades in the U.S. economy,” said Osborne.
“Recession seems a bit of a stretch at the moment.”
