CAD: The little currency has spunk – BMO CM

Douglas Porter, Chief Economist at BMO Capital Markets, notes that since the U.S. election, the Canadian dollar has actually managed to strengthen by just over 1%, as it held broadly steady this week at just over 76 cents ($1.31/US$) making it one of the strongest currencies in the world over that stretch, trailing behind only Brazil and Taiwan.

Key Quotes

“Given that the Bank of Canada often cites “competitiveness challenges” when speaking about Canada’s stubbornly disappointing export performance, it’s pretty clear that this is a less-than-welcome development for policymakers. And, in turn, the loonie’s spunk is often cited as the primary factor behind the Bank’s relentlessly dovish message.”

“There are at least three reasons why the currency has held up so well in recent months. First, firmer oil prices. While some have downplayed the link between the currency and crude, and the direct daily correlation has notably weakened recently, oil and other commodities are still a major driver over time for the loonie. WTI stood at just under $45 on election day and has subsequently had a near-20% bump to over $53, largely thanks to the OPEC production deal.”

“Second, the US$ itself has lost steam in recent weeks. In fact, since the start of 2017, the greenback is actually down against every major currency in the world, reversing much of the post-election bump. Yes, it’s even down a tad against the Mexican peso since the start of the year.”

“Third, Canada’s economy has been surprisingly and refreshingly perky in recent weeks. To wit, job growth has just had its best six months in 15 years (up 239,000), housing remains strong, auto sales are coming off a record year, the trade balance has turned from red to black, and even manufacturing sales ended last year on an upbeat note. We are still looking at GDP growth of around 2% for Q4 and for all of this year, but now see some real upside risk to that call. True, it will take more than that to impress the BoC, given that they are at the high end of consensus at 2.1% for this year. But it’s been quite some time since anyone has talked about upside risk for Canadian economic growth.”

“The resilience in the C$ is being reflected in capital flows, which are suddenly very positive for the currency.”

“Where do we go from here? Capital flows can turn on dime, but we do know that Canada’s trade and current account are poised to improve further over the next year, provided oil prices hold up. Another plus for the C$, is that U.S. officials are likely going to continue talking down the big dollar. Still, we remain defensive on the loonie’s outlook, for two primary reasons—interest rate differentials, and potential U.S. trade measures. There is still the very real risk that the Fed could tighten more than the two rate hikes currently built in by markets this year, especially after the recent wave of upbeat U.S. growth and inflation data. On the flip side, we believe that market pricing of roughly a one-third chance of a BoC rate hike this year overstates the odds by… oh… about one-third.”

On the trade front, we and almost everyone else were breathing a little easier after the uneventful and upbeat meeting between Prime Minister Trudeau and President Trump this week. On balance, we have nudged up our forecast for the year to a 74-cent average and even that may prove to be too low, but not if the U.S. turns truly protectionist.”