Canadian paper bills in 5 10 and 20 dollars
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Investors watching NAFTA negotiations are likely hoping that a resolution to trade woes could boost the lagging loonie. Data in a report from National Bank suggest that hope could become reality if a revamped agreement is reached.

The report includes a graph mapping Canadian dollar values over the last decade. During one period, in particular, the graph shows a gap between actual and modeled values.

“The loonie has remained undervalued vs. its fundamentals for most of the period [from] 2016-2018,” says National Bank deputy chief economist Matthieu Arseneau in the report, referring to the gap.

Before that period, three drivers explained Canadian dollar fluctuations, he says: two-year interest rate spreads between Canada and the U.S., the price of oil and the Bank of Canada’s metals price index.

However, since the emergence of U.S. trade protectionism, modeling Canadian dollar values based on those factors hasn’t resulted in accurate values.

Currently, the gap between actual and modeled values of the loonie stands at 6.5 cents.

That differential suggests “a tangible appreciation could occur if, as we expect, a compromise is reached on NAFTA,” says Arseneau in the report.

In a monthly financial markets report, RBC’s latest currency forecast has the U.S. dollar sitting at $1.30 relative to the loonie in Q3, and at $1.29 in Q4. The outlook for 2019 is between $1.27-$1.28. (US$1 was worth CAD$1.31 on Sept. 11, according to the Bank of Canada’s converter.)

Whether NAFTA can move that forecast continues to be a waiting game.

Read the full reports from National Bank and RBC.