Loonie outlook after the oil downturn

Despite the recent oil downturn, the loonie didn’t lose as much ground as might have been expected.

“Western Canada Select (WCS) oil price and the two-year interest rate spread with the U.S.—both major drivers of the Canadian dollar—are now at January 2016 levels,” says a National Bank currency report. “So why is the loonie not collapsing this time around?”

USDCAD is trading near $1.32, about 10 cents below levels of early 2016.

Despite ongoing headwinds for Canada’s economy, the economic outlook is arguably more positive than two years ago, says the bank.

“The trade sector is benefiting from a booming economy stateside, while domestic demand is also holding firm thanks in part to investment spending, keeping real GDP on track for a second consecutive year of above-potential growth,” says the report.

It adds that speculative net short positions on the loonie are a fraction of what they were in January 2016.

Some economic elements suggest the currency should be stronger than it is, says Desjardins in an F/X forecast.

For example, the central bank is no longer talking about a gradual approach to rate hikes, says the report, and U.S. protectionist threats have eased.

However, investors’ current aversion to risk puts the U.S. dollar at an advantage as the safe-haven currency, says Desjardins, and the Fed’s pace of rate hikes will likely be faster than Canada’s, which would be a headwind for the loonie relative the dollar. Another factor: “Oil could still surprise us by going up or down,” says Desjardins.

Desjardins expects current market pessimism to fade in the coming weeks, which would help the loonie gain back some of its lost ground this quarter, as would the official signing of the new trade agreement.

For more details, read the full reports from National Bank and Desjardins, which includes a global currency market forecast.

Staff

The staff of Advisor.ca have been covering news for financial advisors since 1998.