According to a Reuters poll, the Canadian dollar, last year’s top-performing G10 currency, will shift into a sideways trading pattern this year as the domestic economy softens and the recent boost from easing trade tensions fades.

The currency rallied 5% against the U.S. dollar in 2019, with about half that gain accumulated in the final few weeks of the year as signs emerged of recovery in the global economy and as the United States and China moved toward an interim trade deal.

Canada is a major exporter of oil and other commodities so its economy is more dependent on trade than some other countries, including the U.S.

“Risks decreased significantly at the end of 2019, which helped the loonie and several other currencies. We do not expect another significant reduction in risks in 2020,” said Hendrix Vachon, a senior economist at Desjardins. “We prefer to bet on a fairly flat trajectory for the currency for the short term.”

The poll of more than 40 currency analysts showed they expect the loonie to weaken 0.5% to $1.31 per U.S. dollar, or 76.34 U.S. cents, in three months, from $1.30 earlier this week. It is then expected to strengthen to $1.30 in one year, matching the forecast in December’s poll.

Capital Economics sees a stronger future for the loonie
Stephen Brown, senior Canadian economist with Capital Economics, predicts that the loonie could reach 79 U.S. cents by the end of this year and climb to 82 cents in 2021.

Brown’s thesis is supported by his belief that the energy sector will rebound in 2020 and that the economy will be boosted by a 10% to 15% increase in oil exports. Others have suggested that the loonie could also be boosted by a weakening U.S. dollar, but this view is far from being the consensus.

Brown sees the Bank of Canada standing pat again in 2020, even in the face of a currency rally that may begin to shift its approach from neutral to dovish. Policy makers may be tempted to quash the rally with a rate cut, Brown acknowledges, but he doesn’t foresee that action taking place because it might set the central bank back elsewhere.

“The Bank of Canada is so concerned about potentially adding to the household debt burden by lowering interest rates and making debt cheaper that I don’t think (a loonie rally) by itself is enough to get the bank to cut interest rates,” he said.

Source: Financial Post
Source: Globe and Mail
Source: Financial Post