74-cent loonie
Canada suddenly has a 74-cent dollar again. And it probably won’t stop there.
The loonie has so far traded as low as 73.82 cents (U.S.) and as high as 74.31 cents, sitting at just about the 74-cent mark by midday.
There are several things haunting the loonie, which Société Générale dubbed “another loser” in currency markets, notably the born-again expectations of higher interest rates in the United States.
The U.S. dollar is on the rise, and oil prices are also sinking again.
Here’s how we got to where we are: Economists had expected the Federal Reserve to raise its benchmark rate in December, leaving the Bank of Canada on hold for a long time and thus making the loonie less attractive.
Then Donald Trump began to surge in the polls, threatening mayhem across financial markets, which would stay the Fed’s hand next month because of the uncertainty and turmoil.
But markets instead rallied on his victory, putting a December hike by the U.S. central bank back on the table.
“With a Bank of Canada bias for easier monetary policy, any uptick in Fed hiking expectations is negative for the CAD,” said Société Générale’s Kit Juckes, referring to the loonie by its symbol.
“Canadian growth is underperforming expectations,” which is helping to drive the loonie down, he added.
Unless oil prices rise, the loonie could now sink as low as about 71.5 cents, Mr. Juckes said.
“At those levels the CAD will look very cheap on valuation metrics and ski vacations in Canada may well look more attractive to the British than French ones, but that needs to translate into better economic data before it reverses the currency’s trend.”
There’s the rise in the U.S. dollar itself.
“The U.S. yields are rising steeply on expectations that the Fed will proceed with the next rise at the December meeting, and will also consider at least two to three rate hikes in 2017,” said Ipek Ozkardeskaya, senior market analyst at London Capital Group, adding that this is a “sharp hawkish shift” in expectations for what the U.S. central bank will do.
“Second, oil producers’ currencies are down altogether, as a barrel of [West Texas intermediate crude] extends losses toward $44.”
It is possible that the market has “gone well ahead of itself” in what it expects from the central bank, which would mean a short-term pause, Ms. Ozkardeskaya said. And that makes a speech by Fed chair Janet Yellen next week that much more important.
The loonie could well tumble to about 72 cents by the end of the year if Ms. Yellen “meets the hawkish expectations,” Ms. Ozkardeskaya figured, which in turn would mean the currency will have given up about 70 per cent of the gains it has wracked up since rebounding in January.
Other currencies have also been affected by the Trump victory, including the Mexican peso, which has slumped because of the president-elect’s campaign rhetoric, and Brazil’s real, noted BMO Nesbitt Burns chief economist Douglas Porter.
“Meantime, the [U.S. dollar] is just gradually grinding higher versus the Canadian dollar, up 1.3 per cent since the vote,” he said late Thursday, before the loonie’s latest move down.
“The [Canadian dollar] and the peso had actually seen a very similar pattern up until 2016 - i.e., until the market began to focus on the U.S. election.”