The Canadian dollar fell sharply following Wednesday’s meeting of the Bank of Canada, at which the Bank appeared to imply that interest rates would rise at a slower pace than previously expected. The loonie will, though, see a great deal of support in 2019, experts have said.
The Canadian dollar weakened on Wednesday to its lowest level against the US dollar since June 2017, at C$1.34. A loss for the day of 1.4 Canadian cents followed dovish remarks from the Bank of Canada.
At its monthly meeting, the BoC maintained its benchmark interest rate at 1.75 per cent, as widely expected, but also highlighted weakness in recent GDP data which, coupled with other macroeconomic developments, indicates that “there may be additional room for non-inflationary growth”—that is to say that the Canadian economy is perhaps not as close to capacity as previously believed, warranting a slower increase in the cost of borrowing.
The BoC also noted the 30 percent plunge in oil prices seen over the past 9 weeks. This, it said, will leave Canada’s energy sector “materially weaker than expected.” In 2017, Canada exported more than $54bn worth of crude oil, making the volatile commodity its largest export.
Per several experts, it will be developments on oil that will support higher Canadian dollar valuations over the medium term.
It is no secret that OPEC will discuss production cuts designed to boost oil prices at a meeting in Vienna on Thursday. In the opinion of researchers at CIBC, inevitable cuts will “prompt a further rebound in global crude benchmarks [and] firm up market expectations for BoC hikes, giving a bit more support to the loonie.”
Societe Generale, too, is favouring a higher Canadian dollar in 2019. “If we’re moving to dollar softness . . . we’d rather be short USD/NOK or USD/CAD,” it advised.
Note that Societe Generale would prefer to be long (buy) the Norwegian krone and Canadian dollar, the two most oil-sensitive currencies within G10 FX.
Goldman Sachs is also forecasting an energy market rebound next year. Current oil prices are “extremely attractive,” it said last week.
Regardless of energy trends, Canadian interest rates will be increased next year—at least twice by most estimations—and this should support a trade-weighted rise in the loonie, especially if the gas is turned off on 2018’s US-China trade war.
On Monday, after citing monetary policy-based arguments, Citibank offered a “long-term” USD/CAD forecast of 1.2, which represents a near-12 percent increase in the Canadian dollar’s value.
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