All signs point to downside ahead for the loonie.
“The Canadian dollar is still mispriced,” says Benjamin Tal, deputy chief economist at CIBC World Markets, in a weekly economics report. “Too many factors are pointing in unison to one direction: a lower loonie.”
First off, he notes the full cent drop following the Bank of Canada (BoC) move this week to maintain its benchmark rate, calling the drop highly predictable.
“It was an easy trade. And that trade is still very attractive,” says Tal.
Another factor to the downside is a potentially more aggressive Fed, depending on who’s appointed chair.
“It’s between Jerome Powell and John Taylor,” says Tal, with the latter perceived as more aggressive on monetary policy. If Taylor becomes chair, his reputation could cause the markets to price in a more aggressive Fed — a negative for the loonie.
Further, if Trump makes progress with tax reform — even perceived progress — U.S. small caps would benefit and put downward pressure on the loonie, he adds.
Other potential factors include the Canadian market’s too-high expectation for a December rate hike, along with NAFTA uncertainty.
In fact, Tal says two-thirds of Canadian SMEs say NAFTA uncertainty is affecting their investment decisions, and a greater number of larger firms would probably say the same thing.
“The apathy in the FX market to that unfolding reality is mind boggling,” he says.
Meanwhile, “U.S. monetary policy is leaning in the tighter direction, amid a roaring equity market, a hotter economy, potential tax cuts and, possibly, a somewhat less dovish Fed chair,” says Douglas Porter, chief economist at BMO, in a weekly economics report. “This sudden reversal of fortune in the rate outlook between the U.S. and Canada is the reason the loonie has slid 6% in a matter of weeks, and why it looks to stay at a low ebb for some time yet.”
Say Tal: “We see the loonie depreciating even more than previously forecast, with USDCAD hitting 1.33” in the first quarter of 2018.