Currency concerns seem to be rising again. I’m just one week into my month-long cross-Canada Let’s Talk Exports tour sharing insights from our new Global Export Forecast, and based on conference questions and individual conversations, the loonie is once again blipping on the radar screen. Small wonder – with political uncertainty swirling and a nascent stumble in commodity prices, our dollar’s near-term direction just became a little less clear. Will recent weakness persist? Are we flatlining? Or is a sharp upswing in the works?
Most of the concern seems focused on recent weakness. From the mid- to high-70-cent level in US dollar terms over the past year, the loonie has slid toward the 73 cent range, gradually losing steam. True, it seems a far cry from the air pocket the loonie hit in 2014. From its perch at 93 cents US in the middle of that year, the bird plummeted to the high-60-cent level by early 2016, following the earth-bound swoon in commodity prices. Our dollar staged a partial recovery – a relief to most – but it’s the general down-trend since then that has captured the attention.
Commodity prices are at least part of the problem. To many, economic growth was supposed to send commodity prices the other way. Surely if the global economy was strengthening, prices of raw materials should rise, they reasoned. As such, the plunge in oil and base metals prices was interpreted as just another sign that the world economy was weak, and would remain so for some time. Yet since then, it appears that the world’s big economic engines have actually been gaining momentum. What many analysts seem to have missed is that quantitative easing inflated commodity prices, and as growth prompted the Fed to wind the program down, prices lost their lift.
Here’s the current dilemma: if commodity prices were artificially high for multiple years, and that spurred a lot of over-investment in the mining and energy sectors, then nobody really knows what true equilibrium pricing looks like; the market is still trying to find its feet. And as long as these key drivers of the currency meander, we can expect our dollar to do the same.
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Interest rates are another factor. The Fed is in tightening mode, given looming capacity pressures in the US economy. Not so in Canada; high consumer debt levels and a top-heavy housing market suggest little need for an imminent rate run-up. Markets have long since priced this in to the currency, but any new signs of weakness weigh on the loonie.
Then there’s the greenback. It rose sharply against all currencies as commodity prices sunk, and more recently with all the political bravado of the election and inauguration of the new President. At the same time, worries about the future of the UK and more existential questions about the EU weakened currencies across the pond. The Yen was able to capitalize somewhat, but the most recent movement has been a strengthening of all the major currencies against the USD. All the major non-commodity currencies, that is. Chalk that up to a moment of pre-summer stock-taking, assessments of relative economic progress and uncertainty about a few key commodity balances.
Where to from here? General uncertainty is bound to persist, but it still seems that current evidence is on the side of growth. The US job market remains robust, and the employment picture in the EU is not far behind. Business seems to agree that things are looking up. With the US economy taking the lead, the greenback is expected to maintain its strong level, but to gently lose a bit of its lift over the near term to economies that are playing catch-up. Emerging market demand for basic goods is expected to follow the lead, a positive signal for near-term commodity prices. However, commodity price gains will be tempered by ample product supplies, made available by the considerable investments that persistently high prices attracted to the oil and gas sector, and also to the mining industry.
These signals generally point to a Canadian dollar that will rise over the medium term period, but only very gently. Our forecast calls for the loonie to average 76 cents US this year, rising to 78 cents in 2018. Against the Euro, the Canadian dollar is expected to see 1.39 for 2017 as a whole, and to average 1.33 next year.
The bottom line?
Despite current policy turmoil, the loonie seems in for a season of unusual – but welcome – stability.