markets

Loonie Slide Fails to Unsettle Forecasts for 2018 Outperformance

The Canadian dollar’s poor performance in 2018 has done little to shake strategists’ conviction that the currency will outshine most of its peers by the end of the year.

The loonie has remained at the bottom of the pack among Group-of-10 currencies this month as it faced a double whammy of U.S. President Donald Trump’s tariff threats and the Bank of Canada’s signal that it was in no rush to tighten policy. The Canadian dollar is on track for its third weekly decline versus the greenback, its longest such losing streak since October. Longer-term forecasts from analysts suggest the slump will prove short-lived.

Don't Bin the Loonie

The Canadian dollar is seen as one of 2018's best performers by forecasters

Source: Bloomberg

The Bloomberg currency survey sees the loonie gain 2.7 percent by mid-2018, ending the year 5.2 percent stronger against the U.S. dollar at 1.23, cementing its position among the top three best performing major currencies of 2018. Credit Agricole SA recommends buying Canada’s currency versus the greenback via options to gain from the prospect of monetary policy divergence between the BOC and the Federal Reserve.

“We think that the Canadian dollar will be one of the ultimate winners from the global divergence trade,” said Valentin Marinov, head of Group-of-10 currency strategy at the French bank. “In terms of the relative policy outlook between the Fed and the BOC, markets are fully pricing in the next two Fed hikes while BOC tightening in the second quarter remains underpriced. This is at odds with the BOC already being closer to its inflation target than the Fed.”

The Canadian dollar was at 1.2934 as of 4:06 p.m. in London on Thursday, having slid 2.9 percent since the week ended Feb. 16. It’s the worst G-10 performer this year.

Credit Agricole recommends selling the U.S. dollar against the loonie in options using a put spread. The two-month “1x1.5 ratio put spread” with strikes at 1.27 and 1.25 has an indicative cost of 0.23 percent, according to the bank, which made the call when the pair was at 1.2934 in the spot market.

The recent weakness in Canada’s currency also reflected the risk arising from new trade barriers planned by the U.S. However, Washington said this week that it will initially exclude Canada and Mexico from the tariffs, adding that those exemptions would be based on other conditions.

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