Top Forecaster Sees Loonie Extending G-10’s Best Advance in 2017by
Currency to trade at C$1.32/USD after early-year hiccup
Economic improvement will help loonie rebound from slide in 1Q
The Canadian dollar will strengthen in 2017 as the country’s economy accelerates in the second half of the year and worries over U.S. President-elect Donald Trump’s trade policies fade, according to the most accurate forecaster of the currency.
The loonie will nudge an additional 0.75 percent higher to C$1.32 per U.S. dollar by the end of the year, said Konrad Bialas, chief economist at Warsaw-based foreign-exchange broker Dom Maklerski TMS Brokers SA, who topped a Bloomberg ranking of Canadian dollar forecasters in the fourth quarter. That would extend the loonie’s 3 percent gain from last year, which made it the best performer among Group-of-10 peers.
It’s also in contrast to the median forecast of analysts surveyed by Bloomberg for the currency to weaken to C$1.35 per U.S. dollar by the end of the year
Bialas concedes the currency faces some hurdles in the first quarter. The Canadian dollar fell to a 10-month low in December against its rallying U.S. counterpart after the U.S. Federal Reserve raised interest rates for only the second time since the global financial crisis in 2008.
“The beginning of the year could be difficult for the Canadian dollar, but we’re expecting the trend to start slowing down near 1.38,” a level that could be reached near the end of the first quarter, Bialas said by phone from Warsaw. “The Canadian economy will feel the positive effects of an acceleration of growth worldwide and the risks to trade with the U.S. -- the worries over tearing down NAFTA -- will drop.”
Investors have been concerned Trump may throw up roadblocks to trade between Canada and the U.S. after he vowed to renegotiate the North American Free Trade Agreement. On Tuesday, he threatened to make General Motors Co. pay a tariff for importing Mexican-made cars into the U.S.
The Canadian dollar jumped 1 percent to C$1.3294 per U.S. dollar on Wednesday, extending its run as the best-performing major currency into this year. It’s still much weaker than its five-year average of C$1.1486.
Investors have priced in “too much pessimism” in the loonie, given the recent increase in oil prices, a global pick-up in inflation and the fact that Canada’s economy is already past its rough patch, according to Vasileios Gkionakis, head of global foreign-exchange strategy at UniCredit Group SpA in London. He expects the currency to appreciate to C$1.22 against the greenback by the end of this year, one of the most bullish forecasts in a Bloomberg survey.
“When you see currencies as having to reflect a set of fundamental factors, the Canadian dollar has no business sitting at 1.34,” Gkionakis said by phone. “I wouldn’t be surprised if in the first half of 2017 markets started pricing in some possibility of a hike in Canada in 2018.”
Not everyone is that bullish.
“There are some holes in the Canadian story,” John Hardy, head of foreign-exchange strategy at Saxo Bank A/S in Denmark, said by phone. He is one of the most bearish forecasters of the currency, expecting the loonie to weaken to C$1.48 per U.S. dollar by the end of the year as the greenback strengthens further. “Canada has got a housing bubble that puts the U.S. housing bubble to shame.”
But for TMS’s Bialas as much as 70-80 percent of the U.S. dollar’s rally is already priced in. He expects it to fade as investors realize the currency’s strength and a surge in yields stifle economic growth in the world’s largest economy. At the same time, inflation will continue picking up globally and in Canada, which will provide a boost for the Canadian dollar.
“If reflation is the theme of 2017, it can’t happen without Canada,” Bialas said. “There is a risk premium priced in the Canadian dollar right now and it will ease.”