When the OPEC countries struck a deal to cut oil supply last year, that created a positive environment for the Canadian dollar.
As a result, the loonie has held on better than expected, says Vincent Lépine, vice-president of Global Economic Strategy (Asset Allocation and Currency Management) at CIBC Asset Management.
But that may not last. Says Lépine, “This is a very fragile equilibrium because [the] OPEC [countries] are cutting production and have been doing what they said they would be doing, but they’re no longer the big player in the market.”
That big player is now the U.S., he says, meaning “it’s important to look at what U.S. producers are doing; as OPEC is cutting production, U.S. producers are increasing production. Because of this, oil prices are likely to be lower rather than higher and, for the Canadian dollar, that means it will be weaker as we move into 2017.”
Read: Why to expect more currency volatility
That makes it tough to make currency calls. “In the background, we’ve got U.S. dollar strength that’s been in place for the last three years, and that’s likely to continue,” says Lépine. And, “you’ve got specific cases like the U.K., where we still don’t know how Brexit is going to unfold.” He predicts the pound will be the weakest among its peers in 2017.
For the euro, Lépine predicts uncertainty will be an issue. “We’ve got a lot of geopolitical events happening in the eurozone, and investors generally don’t like that. […] We’ve got the French election [and elections in] the Netherlands, Italy and Germany, so the whole political landscape could change radically as we move into 2017. So, the euro is likely to be weaker than the U.S. dollar.”
Throughout the year, he adds, “investors are going to be looking for safety and they’ll be flying to the safe havens. One candidate is the yen, so it’s likely to get stronger in 2017.”
Read: In an uncertain world, Japan remains safe haven
Here are current currency valuations versus the U.S. dollar.
Loonie: US$0.75 (as of March 3)
British pound: US$1.23 (as of March 3)
Euro: US$1.06 (as of March 3)
Yen: US$0.0088 (as of March 6)