Contrary to the Bank of Canada’s goal, the loonie may appreciate in the near term.
“In the short term, we should see the Canadian dollar follow the progress of oil prices and the U.S. dollar,” says a Desjardins FX forecast. The report notes the drop in oil prices did weigh on the loonie in April and the beginning of May–which resulted in “the currency [being] worth less than US$0.73”–but now, “the recovery of crude oil prices in the past two weeks or so has lifted [the loonie] back to US$0.74.”
As of May 25, the Canadian dollar was worth US$0.7433, compared to a one-week low of US$0.7383 on May 19 and a three-month low of US$0.7276 on May 4.
During that period, “The loonie was also hurt by fears of a surge in U.S. protectionism at the end of April. Those fears have calmed somewhat, and the Bank of Canada did not mention them in its most recent monetary policy statement,” says Desjardins’s forecast.
The loonie isn’t the only currency benefiting from a U.S. dollar dip, the bank adds: as of May 26, the euro has appreciated to US$1.1196. Another driver of this is “growing optimism about the European economy.”
Desjardins adds, “The markets seem to be positioning themselves for a change of tone from the European Central Bank (ECB).” And, “The election of pro-euro Emmanuel Macron as President of France has boosted optimism after extreme-right and anti-euro parties captured headlines in Europe for several months.”
Trends to watch include:
- The loonie falling back as the U.S. rebounds, especially if the Fed hikes in September against market expectations. Further, “A strengthening of U.S. economic growth after a difficult start to the year should help,” as would some realization of President Donald Trump’s expectations, says the forecast.
- Overall, says Desjardins, “The loonie doesn’t seem likely to make a sustainable return to US$0.75 and over, in the next few months. Later in the year, it might profit from higher expectations of monetary tightening in Canada.” Read: Loonie to hit trough in Q3: forecast
- The euro is in for a rough ride, with geopolitical and economic challenges on the way. Read: Why pick the pound over the euro?