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Luc de la Durantaye, chief investment strategist and CIO, CIBC Asset Management.
I think the U.S. dollar is an important aspect. You’ve had, following the pandemic escalation, you’ve created a slow down in world economic activity, created a decline in commodity prices and that created a shortage of U.S. dollars globally. That is because a lot of, for example, think of commodity producers, are receiving less dollars for the sale of the commodity they sell. Think also of a number of foreign companies borrowing in dollars where their revenues — because the lockdown of economic activity is reducing their revenues, but they still have to pay their debt in U.S. dollars — so there’s a scramble for U.S. dollars. The original shock was a rise in the U.S. dollar against every currency around the world.
The Federal Reserve reacted very quickly in stemming disorders of dollars through various programs that they’ve implemented. Particularly the swap facilities, and they extended those swap facilities to a larger number of central banks around the world. Essentially, this is to provide U.S. dollars to the rest of the world. That has stemmed the rise of the dollar and started to reverse it. That’s been the key driving factor in the currency market. It’s left the U.S. dollar fairly expensive. The Federal Reserve, more than most central banks, have instored a number of measures that are essentially flooding the market with liquidity — flooding the market with U.S. dollars. Therefore, we would see from here a stabilizing dollar or a declining dollar in the longer term.
As long as there’s, and this is going to be a caveat throughout economic outlooks, is as long as the pandemic is resorbing itself in what seems to be another two months, meaning May to June. If the pandemic is longer and/or there’s a second wave of it in the fall, then those scenarios would be more bearish. But the scenarios we’re working with currently is for lockdowns or social or physical distancing requirements to start to ease sometime in mid-May to late-May or in June at the latest in various parts of the world. Then you can kick-start the global economic recovery. That would mean a weakening U.S. dollar from there.
What does that mean for the Canadian dollar? Well, the outlook for the Canadian dollar is more complicated because of the other shock that occurred during this first quarter of 2020 — the oil shock. As we speak, there is an agreement, that is not quite finalized, but there seems to be an agreement with OPEC+ and a larger group of commodity oil producers to cut over 10 million barrels of oil a day of production and to stabilize oil prices. This will be very key for the Canadian dollar, obviously, given the fact that we are obviously a large oil producer.
But nevertheless, in relative terms, we see that Canada may be at a disadvantage. We have high-cost producers. Relative to other parts of the world, like Russia, like the Middle East, we’re higher-cost producers. We would not necessarily benefit as much from a recovery in oil prices.
The other element is that this cut that OPEC is talking about, they’re talking about 10 million barrels a day, but so far the pandemic is estimating that the surplus or the lack of demand is more than 20 million barrels a day. Before oil prices stabilize, they could stabilize at $20, originally $20 to $25, and they could stay there for a little bit longer until the fall. From that perspective, we don’t see a strong recovery in the Canadian dollar. In terms of US/CAD, we’ve talked about 1.39 as a peak. If there is no recovery in oil prices and the pandemic stays a little longer, Canadian dollar could revisit the recent lows of 1.45, 1.46. This is the range where we’re working with, with the Canadian dollar.