From the loonie to the euro: currency update

The Federal Reserve’s firm statement last week that a December rate hike remains on the table wasn’t good news for the loonie, which had reached US$0.83 after two hikes by the Bank of Canada.

Read: Why there’s too much love for the loonie

Loss of loonie steam can also be attributed to remarks from the B0C’s deputy governor, who commented that future actions by the central bank would “pretty strongly” take the loonie’s gains into account, notes Douglas Porter, chief economist at BMO, in a weekly economics report.

The double whammy took the loonie almost all the way back down to where it stood before the BoC’s latest rate hike, he says.

Downplaying expectations for further rate hikes — at the same time that the Fed has left a December hike on the table — means “two-year yield spreads will move back in favour of the U.S. and pull the loonie down from recent lofty levels,” say economists Andrew Grantham and Royce Mendes in a CIBC weekly economics report.

Read: Fed to end quantitative easing in October

Another loonie tumble could come on Wednesday, when BoC Governor Stephen Poloz is scheduled to give a speech.

Read: What to watch this week at home and abroad

Speaking broadly, Porter says, “We believe that the currency already has a lot of good news built into it, and is more likely to soften further in coming months, rather than regain strength.”

Grantham and Mendes expect the loonie to fall to US$0.77 (USDCAD 1.30) within the next six months. BMO’s year-end target is US$0.80.

Read: What Canada’s hot streak means for interest rates

Sterling and euro

Across the pond, any increase in sterling linked to a potential Bank of England rate increase could be short-lived, says the CIBC report, since “real earnings growth is now back in negative territory.”

Read: Why pick the pound over the euro?

Meanwhile, European Central Bank head Mario Draghi has underlined his concern about the recent rise in the euro’s exchange rate.

Draghi said Monday that “the recent volatility in the exchange rate represents a source of uncertainty which requires monitoring.”

The euro has risen from US$1.05 at the start of the year to around US$1.19. A further increase could weigh on exports from the eurozone and restrain its ongoing economic recovery.

The ECB is expected to outline at its Oct. 26 meeting how it will start phasing out its bond-buying stimulus worth 60 billion euros (US$71 billion) a month.

Read the full reports from CIBC and BMO.

Also read:

EU headed for decade-high growth while Britain struggles