Donald Trump’s economic agenda will be among the factors that will push down the Canadian dollar to as low as 70 cents U.S. next year, currency analysts predict.
Markets are betting that Trump’s plans to massively increase infrastructure spending while cutting taxes — increasingly known in business and finance circles as Trumponomics — will prompt the U.S. Federal Reserve to raise interest rates in December.
They’re so sure of it, in fact, that markets are pricing in a 100-per-cent chance of a rate hike.
(Photo: Nick Koudis via Getty Images)
“Despite the concern raised by the new president-elect, the markets have essentially focused on the tax cuts and deregulation pledged by Donald Trump, which may stimulate the U.S. economy in the near term,” economists at Caisse Desjardins wrote in a client note Wednesday.
They predict the loonie will fall to 73 cents U.S. by the end of this year, and will continue a slow slide to 70 cents by the end of 2017. It was trading at 74.3 cents U.S. as of mid-day Wednesday.
As U.S. interest rates rise, currency traders will take money out of Canadian dollars and put it into U.S. dollars to take advantage of the higher returns.
“There’s only so much economic juice to be squeezed out of indebted consumers."
— Economists at CIBC Capital Markets
The Desjardins report noted that the loonie's slide could intensify if the Bank of Canada decides to cut rates again. Most forecasts predict the BoC will stand pat on rates this year, but in a currency outlook yesterday, economists at CIBC said the BoC could change its mind if the economy comes in even slightly weaker than expected.
“The Canadian dollar has been on a weakening track for some time,” they wrote. “There’s only so much economic juice to be squeezed out of indebted consumers, and government policy is starting to lean against a further housing boom.”
CIBC’s forecast for the loonie is a little stronger than the Desjardins outlook. They see the loonie declining to 71.9 cents in the first quarter of next year, then strengthening to 73 cents U.S. by the end of 2017.
The Canadian dollar has been sliding since the U.S. election. (Chart: Xe.com)
The Bank of Canada has signalled in its statements that it’s happy with a low loonie, because it helps exporters, which could in turn help Canada’s economy overcome the decline in oil prices.
“Disappointments on that front have only exacerbated that trend to a softer loonie,” the CIBC economists wrote, referring to the fact that exports have been weaker than expected this year.
And there’s a crimp in the Bank of Canada’s low-loonie approach: The Canadian dollar is only weaker than the U.S. dollar, not other currencies.
In fact, as the U.S. dollar soared after the Nov. 8 election, it pulled the loonie up with it. (The greenback hit a 13-year-high against other currencies on Wednesday.)
The Canadian dollar has lost one per cent of its value against the U.S. currency since the election, but has gained four per cent against other major currencies, Bank of Montreal senior economist Sal Guatieri wrote in a client note.
(Chart: Bank of Montreal)
Stripping away the U.S. dollar, the loonie recently hit its highest point this year against major currencies.
“Exporters will need to find other ways to level the competitive playing field (i.e., productivity gains, innovation, corporate tax cuts, lower power costs, lower wages, etc.),” Guatieri wrote.