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14¢ later: Canadian dollar forecast to spike as high as 87¢ next year

14¢ later: Canadian dollar forecast to spike as high as 87¢ next year

Briefing highlights

  • Loonie forecast to spike further
  • Markets at a glance
  • Roots files for IPO
  • BoE paves way for rate hike

A dime ago

Remember 73 cents?

That's where the Canadian dollar stood as recently as early May.

We're now almost a dime later, and the loonie is forecast to spike higher still, possibly to 87 cents by the end of next year, or about 14 cents ahead of where we were in the spring.

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That's the latest projection from Bank of Nova Scotia. JPMorgan Chase sees a far faster surge, to 86 cents by the first quarter of 2018.

Others aren't as bullish as Scotiabank and JPMorgan. But many analysts have nonetheless revised their forecasts, and see the loonie climbing in the wake of the Bank of Canada's sudden summer shift.

A jolt, actually. First it changed its tone, then raised its benchmark interest rate twice in a row, to 1 per cent, which has analysts redrawing their rate-hike forecasts, too.

"Even more rate increases would be required in 2018 were it not for our expectation that the Canadian dollar will appreciate substantially over the coming year and act to cool growth and inflation somewhat," Scotiabank chief economist Jean-François Perrault said in the bank's new outlook.

Mr. Perrault now sees the currency at 83 cents (U.S.) by the end of this year, and 87 cents by the end of next.

"This is based on our view that Canadian interest rates will rise more rapidly than expected at present by the market and narrow the rate differential between Canada and the U.S. amidst a continued global move away from the U.S. dollar," he said.

"Oil is not anticipated to have much influence over the loonie through next year given that we forecast a relatively flat profile for crude over this time."

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Like Scotiabank, JPMorgan sees the Bank of Canada's key overnight rate rising faster than some other observers project, to 2.25 per cent by the end of 2018.

That prompted the U.S. bank to sharply revise its outlook for the dollar, to 86 cents in the first quarter from its earlier projection of just below 76 cents, because its earlier "cautious" assumption has been shattered in two ways, said JPMorgan's Daniel Hui.

"First is the continued growth breakout in Canada," Mr. Hui said, citing the second quarter's economic expansion at an annual pace of 4.5 per cent, itself following three strong quarters averaging 3.5 per cent.

The second factor is, of course, the marked shift by the Bank of Canada to now signal "a likely steady path of policy normalization, in spite of the same undershooting core inflation trend, which has kept Fed policy pricing depressed."

Despite cool so-called core inflation, which excludes volatile prices, the "BoC's confidence is probably reinforced by the fact that their primary indicator for overall economic slack comes from their estimates of GDP-based output gap (contrasted with the Fed's primary focus on the unemployment rate)," Mr. Hui said.

"With the recent string of upside quarterly growth surprises, the BoC's estimates of output gap has rapidly closed to 1 per cent from 3 per cent a year ago, causing BoC to have successively pulled up anticipated timing of output gap closure from an earlier estimated mid-18, to end-17 in the July [monetary policy report]."

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Others aren't as strong in their outlook.

Royal Bank of Canada, for example, sees the currency ending this year at just shy of 81 cents, and next year at below 79.5 cents.

Bank of Montreal, in turns, puts the loonie at 80 cents by the end of 2017, and 83 cents a year later.

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