Canadian Dollar Viewed From Down Under Looks Like Global Laggardby
Loonie may trail even commodity-linked Aussie, kiwi, NAB says
Slowing manufacturing on top of oil rout drives rate-cut calls
When currency strategist Ray Attrill arrived in Toronto last month, he was feeling quite positive about the Canadian dollar. After meetings with investors and economists, his view changed.
"You know what? The Canadian dollar is my least favorite currency in 2016," Attrill, National Australia Bank Ltd’s global co-head of foreign-exchange strategy, said from Sydney. "I couldn’t believe how negative some people in Toronto were about their own economy and their own currency."
After the trip, Attrill lowered his forecast, calling for Canada’s dollar to weaken to C$1.47 per U.S. dollar during the first quarter. That prediction looked dire until Sydney-based Macquarie Group Ltd. projected the currency will reach an all-time low of C$1.6949 by late 2016, from around C$1.46 Wednesday, more bearish than any outlook in a Bloomberg survey of analysts. The currency is down for a 14th straight day, extending its longest losing streak as a freely traded currency.
Both Canada and Australia have experienced foreign-exchange market punishment for running a commodity-driven economy. Their currencies are among the bottom-of-the-barrel Group-of-10 currency performers during the past year as slowing Chinese growth has reduced the demand for raw materials worldwide and volatility in its currency and equity markets turned traders off riskier strategies.
The loonie, as the Canadian dollar is known for the image of the aquatic bird on the C$1 coin, has declined 5 percent this year against the U.S. dollar. It reached the weakest level last week since April 2003, as crude oil dropped below $30 per barrel in New York. The loonie declined 18 percent against its U.S. counterpart during the past year, compared with drops of 17 percent for the New Zealand dollar and 16 percent for the Aussie.
The big question for the Canadian economy in 2016 is whether it will be able to benefit from the strengthening U.S. economy, or if pressure from weak oil prices will keep the economy in near-recession conditions, Attrill said. Canadian stocks fell to a 2 1/2-year lows last week while government-bond yields declined to records on refuge demand.
"Companies looking to take advantage of relatively cheaper costs of production relative to the U.S. were much more likely to be looking south to Mexico than north to Canada," Attrill said.
National Australia Bank sees the Canadian dollar under-performing the Australian and New Zealand dollars this year because of the comparatively worse terms of trade for Canada on weak oil prices. Australia also has a positive trade position with China on tourism and education, he said.
Canada is also parting ways with its fellow commodity-producing nations on monetary policy. The futures market is giving even odds the Bank of Canada cuts interest rates Wednesday for the third time over the past year, while Attrill said Australia and New Zealand were unlikely to trim borrowing costs.
Not all forecasters are as doom-and-gloom on the Canadian dollar. UniCredit SpA said the currency has already corrected for fundamentals and past over-valuation.
"We expect the oil price to bottom out and recover some ground to some extent and this may offer some room for strong appreciation by the loonie," said Roberto Mialich, a senior foreign-exchange strategist at UniCredit SpA, by phone from Milan.
The bank forecasts a rally to C$1.38 this quarter and strengthening to C$1.25 by the end of the year, as the price of Brent crude recovers to between $50 to $55 a barrel, he said.
The median forecast for the Canadian dollar is to strengthen C$1.38 for the first quarter and C$1.36 by the end of the year, according to data compiled by Bloomberg.
The loonie may take another leg down if the Bank of Canada cuts interest rates again. Macquarie Group, Bank of America Corp., Credit Suisse Group AG and Toronto-Dominion Bank are among the banks forecasting a cut.
"What you really need to see is for manufacturing to start to pick up and those non-energy export volumes to start to pick up," said David Doyle, the Toronto-based Macquarie analyst behind the forecast and the top-ranked forecaster for the U.S. versus Canadian dollar exchange rate, according to Bloomberg rankings. "In order for those areas to pick up a little bit more, you probably need further weakness in the Canadian dollar."