The loonie can’t seem to catch a break, sinking for a third consecutive month in April. The Canadian dollar currently stands at about $1.36 against the greenback.
Despite strong economic data and a rising GDP, other forces are colluding against the dollar, including recent U.S. import duties on Canadian lumber, the potential for further U.S. protectionist policies, a dovish central bank and soft oil prices.
And the situation could worsen.
For instance, foreign direct investment likely won’t improve if U.S. corporations benefit from tax cuts and if Canada-U.S. trade continues to deteriorate, says a report on foreign exchange by National Bank.
Net foreign purchases of Canadian bonds remain strong, however, at $7 billion in February, in line with the monthly average of the last two years.
“But there’s no denying the Canadian dollar remains vulnerable to a negative turn in foreign investor sentiment,” say report authors Krishen Rangasamy and Stéfane Marion, senior economist and chief economist, respectively, at National Bank.
But not all is bleak for the Canadian dollar. “We expect a more hawkish tone from the Bank of Canada later in the year in response to a second half rebound [in growth] and the need to cool a hot housing market,” say Rangasamy and Marion.
They expect core inflation to rise in the second half of 2017, forcing the Bank to ditch its dovish tone. And they see the loonie hitting a trough in Q3, instead of Q2 as they previously forecasted.
Meanwhile, the U.S. dollar depreciated for the fourth straight month, largely due to the stronger euro (EURUSD is €1.09), which has been boosted by improving economics data and French first-round election results.
“We still expect the world’s reserve currency to bounce back courtesy of a more hawkish Fed,” say Rangasamy and Marion, “which is poised to add to last March’s rake hike, more so considering upcoming fiscal stimulus from the Trump administration.”
However, as global growth improves, other central banks may follow the Fed and start removing accommodation, so a recovery for the U.S. dollar could be shortlived. “We now expect the trade-weighted USD to peak in Q3, instead of the last quarter of the year,” say Rangasamy and Marion.
Protectionism remains a concern, however, and U.S. trade policy could cause the U.S. dollar to appreciate sharply if it improves U.S. trade balance and spooks global investors.
Read the full report.