A surge of near 40 per cent in oil costs has helped make the Canadian greenback one among this yr’s greatest performing main currencies. That resiliency may quickly be examined if crude loses momentum.
Many forecasters seem skeptical concerning the prospects for oil to advance a lot past its present stage, doubtlessly sapping some assist from the loonie. West Texas Intermediate was at round $63 (U.S.) per barrel on Monday and the median forecast in a Bloomberg survey is for it to finish the yr close to that stage.
“We don’t see the identical impetus coming from oil costs,” stated Bipan Rai, the North American head of foreign-exchange technique at Canadian Imperial Financial institution of Commerce. “So it begs the query about whether or not we will depend on incoming knowledge to essentially drive some assist for the loonie. That’s nonetheless just about a wild card.”
The Canadian greenback has superior 2.four per cent this yr in opposition to the U.S. forex, trailing solely the British pound amongst its Group-of-10 friends. Oil has offered some buoyancy, however Canada’s home image has been extra cloudy. There’s mounting concern about family indebtedness, residence costs are dropping and development virtually floor to a halt within the last a part of 2018. Whereas development numbers for January have been extra upbeat and unemployment stays near multi-decade lows, the central financial institution has develop into extra circumspect. Financial institution of Canada Gov. Stephen Poloz this month recommended that he’s settling right into a holding sample on interest-rate coverage. The worldwide slowdown, coupled with a housing sector that’s taking longer to regulate to tighter mortgage guidelines and better charges, means the economic system nonetheless wants the assistance of low borrowing prices, the BOC boss stated.
“Canada’s bought to fret about a further issue that the U.S. doesn’t at this level, and that’s the indisputable fact that our family sector is extraordinarily leveraged,” stated Rai, who relies in Toronto. “It may show to be a way more extended slowdown given that you could be see households deleveraging.”
He sees the loonie weakening to round $1.36 (Canadian) per dollar by the top of this yr and $1.40 in 2020. It was at $1.3322 on Monday.
Toronto-Dominion Financial institution additionally sees the Canadian forex coming beneath stress, with forex strategist Mazen Issa pointing not solely to dangers from family debt but additionally potential spillover results from worldwide commerce fights.
“We’re mainly a scenario that may be very troublesome to search out any positives for the Canadian greenback general,” stated Issa. “In truth, it’s most likely going to proceed to worsen.”
Not all observers are so pessimistic although. Financial institution of Montreal’s world head of foreign-exchange technique, Greg Anderson, expects the loonie to rally to $1.30 per greenback by yr finish, whereas Scotiabank forecasts it’s going to go to to $1.27.
Eric Theoret at Scotiabank sees a weak dollar atmosphere fuelling commodity-price positive factors and boosting Canada’s phrases of commerce, and says there’s room for enchancment within the forex if crude costs proceed to rise.
“If oil costs maintain shifting the way in which they’re, it ought to enable the Financial institution of Canada to withdraw a few of the lodging that they’re presently offering,” stated Theoret.
Even when oil recovers, RBC Wealth Administration expects the Canadian greenback to commerce round its present ranges till mid-year, with some modest softness taking it to a spread of $1.34 to $1.36 per greenback by yr finish. Laura Cooper, head of FX options and technique at RBC Wealth, sees restricted scope for oil to bolster the loonie as a result of pipeline constraints are serving to to take care of a worth hole between Canadian crude and the U.S. benchmark worth. She’s additionally uncertain of any main shift from price differentials, since each the Federal Reserve and the Financial institution of Canada are signalling prolonged tightening-cycle pauses.
“Within the absence of a catalyst coming from price dynamics or commodity costs, we see the forex buying and selling broadly sideways in coming months,” she stated.