What will the loonie’s value be at the end of 2016?
The value of Canada’s dollar relative to the USD helps determine the profitability of Canadian agriculture: it impacts the commodity prices our producers receive and the input prices they pay. The loonie’s recently depreciated against the greenback to Canada’s very clear advantage, but how long will that last?
Craig Klemmer and JP Gervais debate where the dollar will land by year-end.
The loonie will finish 2016 above US$0.75
Financial markets dictate the outcome of currencies, based on oil, U.S. interest rates and other drivers. Despite forecasts of continuing weak oil prices and a rate hike in the U.S., I expect the loonie to end the year above US$0.75.
3 reasons why
1. Expectations matter more than actual decisions
Financial markets look forward. They don’t live “in the moment” and they certainly don’t look backward. This means any decision by the U.S. Federal Reserve to raise their key interest rate in December has largely already been anticipated and incorporated into financial markets’ valuation of the loonie. The estimated probability to see a higher U.S. rate in December is relatively high (70%). So the actual rate hike in the U.S. won’t move the loonie below US$0.75.
2. Stability in the oil market
Oil prices climbed in 2016’s first six months, then dropped. Now approaching US$50 a barrel, whether they’ll climb again depends on major producers collectively agreeing to cut production. Even though such an agreement wouldn’t likely last, the short-term consequence would be higher oil prices – and a higher loonie.
3. The Canadian economy will rebound
A cut to the Bank of Canada’s key interest rate would likely depress the loonie. However, I see an expanding Canadian economy, one that should reassure financial markets the Bank of Canada won’t cut the rate in the near-term. Exports should recover, Canadian manufacturing sales data show growth in 15 of 21 industries and household spending is very strong. A better than expected performance of the Canadian economy will be important for the market’s assessment of Canada’s currency.
The loonie will finish 2016 below US$0.75
The strongest influences on the value of the Canadian dollar are: changes in oil prices, the spread between Canada and U.S. economies, and the strength of U.S. consumer spending. Financial markets’ valuations are based on the fundamentals of these drivers.
3 reasons why
1. Oil prices likely to remain low
Oil prices are unlikely to gain much strength, keeping the loonie below US$0.75. Recently, oil prices rallied after many of the world’s major producers agreed to limit oil production, and U.S. oil stocks declined. But those production cuts would need to be sustained to push up oil prices enough to lead to an appreciation of the loonie. That’s not likely. The potential revenue losses facing members of the Organization of Petroleum Exporting Countries (OPEC) cutting production are why.
2. U.S. economy on track to outperform Canada’s
With economic growth expected to be higher in the U.S., support for the loonie will be difficult. The Bank of Canada recently forecast the U.S. economy to grow 1.5%, and Canada’s economy to grow 1.1% in 2016. The greater strength in the U.S. economy will spur additional investment in the USD relative to investment in the CAD.
3. U.S. interest rates expected to increase
The U.S. Federal Reserve is expected to increase interest rates in December as the U.S. economy continues to expand and the labour market has largely recovered. Any rate hike could also be accompanied by a statement of a future rate increase, thereby strengthening the USD relative to the CAD.