Briefing highlights
- Range of loonie forecasts extreme
- Markets at a glance
- Bank of Japan holds steady
- S&P cuts China’s credit rating
'Durably strong'
The range of views on the Canadian dollar is growing extreme.
Indeed, there's a 12-penny divide among the most recent forecasts, from 75 cents (U.S.) to 87 cents.
Starting at the top, JPMorgan Chase sees the loonie at 87 cents by early 2018 as the Bank of Canada raises its benchmark interest rate from where it sits now, at 1 per cent, after two recent hikes.
At the bottom is Capital Economics, which, based on its long-held-but-yet-to-happen belief that Canada is headed for a housing meltdown, suggests the central bank could reverse course and cut rates in 2018, driving the loonie to its low by the end of the year.
David Madani, Capital Economics: "We expect the Bank of Canada to raise interest rates to 1.25 per cent by the end of this year, but we still strongly believe that its policy tightening is ill-timed and expect the economy to lose momentum due to a housing bust. Needless to say, this would eventually prompt the Bank of Canada to abort its rate hike cycle and if, as we anticipate, growth slows sharply, potentially cut interest rates to 0.5 per cent next year."
Daniel Hui, JPMorgan: "While presently, BoC is signalling a reasonable level of comfort with embarking on a path of gradual policy normalization, the relatively frothy condition of the real estate market and its contribution to past growth creates uncertainties … about the potential heightened sensitivity of growth to rising interest rates. Our economists recently assessed housing market correct risk in Canada to only be around 20-per-cent probability."
These forecasts came after the Bank of Canada's latest rate hike but before Wednesday's Federal Reserve outlook that helped knock the loonie.
Many other forecasters are between those two. Some recent projections:
Jean-François Perrault, Bank of Nova Scotia: "The loonie should appreciate to 83 cents by the end of 2017 and rise further to 87 cents by end-2018. 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."
Olivier Korber of Societe Generale, who sees the loonie as "durably strong," puts the currency at above 83 cents in the first quarter of 2018, and staying there through the year: "Oil performance has been instrumental in boosting the currency, even though the long-term picture suggests that the currency has largely overshot the rebound in oil prices. However, the [Canadian dollar] is on the right track to remain strong as the interest rates factor takes over from the commodity factor."
Michael Gregory, Jennifer Lee, Benjamin Reitzes and Carl Campus, BMO Nesbitt Burns: The currency should end 2017 at 80 cents, and 2018 at about 83 cents: "We've penciled in a January [interest rate hike] as the next course of action, while maintaining some skepticism that the BoC will out-hike the Fed over the next year (reflecting the risk of a too-strong loonie)."
National Bank of Canada: Analysts project a range of between about 77 cents and above 83 cents over the next 12 months, possibly topping the latter should the Bank of Canada go beyond the one further rate hike priced in by markets for this year: "Our call for the Canadian currency to lose steam next year assumes the Federal Reserve pushes its own Fed funds rate up to 2 per cent by the end of 2018."
While Canadians travelling south may welcome the stronger loonie, that's not the case for exporters selling to the south.
Just look at this week's manufacturing snapshot from Statistics Canada, which showed a sales drop of 2.6 per cent in July to mark the second weak showing in a row.
"It's been a rough two months for exports, and the Canadian manufacturing sector has felt the pain," said Nick Exarhos of CIBC World Markets.
"The year-to-date-gains in the factory sector have now been reversed, giving reason for pause to those who would bid up the Canadian dollar much further, or price in a too-aggressive path of tightening from the Bank of Canada from here," he added.
Indeed, added National Bank, "while Canadian exporters will hope to see a weaker currency sooner rather than later, they would be wise to make plans while assuming [a Canadian dollar closer to 83 cents] for an extended period of time."
The travel side of this is nothing to ignore.
Numbers from Statistics Canada Wednesday showed Canadians flocking to the U.S. as the loonie strengthens. Canadians made 3.4 million trips across the border in July, just 0.3 per cent more than a year earlier but 1.1 per cent more than in June. Those who went by plane on more than a day trip rose almost 13 per cent from a year earlier to a record for the month of July, the agency said.
"The value of the Canadian dollar, one factor influencing cross-border travel, stood at US$0.80 on July 31, compared with US$0.75 at the end of June and about US$.77 in July, 2016," it added.
Read more
- David Berman: Why the loonie took a sudden dive Wednesday
- David Parkinson: Fed embarks on a tricky path back to normal
- ’Hawks in charge’ of Canadian dollar as U.S. dollar ‘unhinged’
- 14¢ later: Canadian dollar forecast to spike as high as 87¢ next year
- How Canada could end up with the G10’s highest interest rates
- Barrie McKenna, Rachelle Younglai: Bank of Canada, major lenders hike rates as economy roars
- David Parkinson: The beginning of runaway rate hikes? Don’t bet on it
Markets at a glance
Read more
More news
- S&P cuts China’s credit rating, citing rising debt
- BOJ keeps monetary spigot open, new board member dissents