The Canadian dollar’s fall from grace may yet have a way to go.
Its depths, of course, depend on everything from oil prices to monetary policy to trade relations with the United States.
“With Canadian short-term rates in lock-down mode, oil sagging and the U.S. blustering on trade, the loonie is set to remain on the defensive for some time yet,” Bank of Montreal chief economist Douglas Porter said in a recent report.
“While we have the currency recovering to around the 75-cent level by the end of the year (from 73.5 cents now), that view depends critically on a rebound in oil prices and a trace of normalcy in trade.”
The loonie, at just over 73 cents U.S. this morning, was hit most recently by the U.S. Commerce Department’s decision to slap countervailing duties on Canadian softwood lumber exports.
This came as President Donald Trump not only criticized lumber trade, but also lashed out at Canada’s dairy and energy industries.
The loonie had already been hurt by the oil shock and the different paths of the Canadian and U.S. central banks.
Note, too, the increasingly bearish view among speculators.
The latest report from the U.S Commodity Futures Trading Commission shows a net short position against the loonie rising to $3.1-billion.
The report was released late last week but measured as of last Tuesday, after news of the U.S. lumber decision, but before President Donald Trump said he would like to try to renegotiate the North American free-trade agreement, rather than just kill it without talking about it.
In terms of contracts, the net short now stands at more than 40,000, or the highest since early last year.
“Not since February, 2016, have the sharks been sniffing so much blood – hard to imagine that just two months ago, when the loonie had rallied to [almost 77 cents], that the net speculative position was long 31,637 contracts,” said David Rosenberg, chief economist at Gluskin Sheff + Associates.
“This is epic.”
Mr. Rosenberg noted that the Australian dollar, which like the loonie is commodities-linked, boasts a net long position of almost 40,000 contracts.
“Then again, Trump isn’t exactly barking at Australia’s dairy farmers and lumber producers,” Mr. Rosenberg said.
Even Mexico’s peso, which had been hammered as Mr. Trump made his southern neighbour his favourite target, now has a net long position, he noted.
And here’s another telling sign, this one from National Bank of Canada senior economist Krishen Rangasamy and chief economist Stéfane Marion: “Speculators amplified the loonie’s decline by increasing their short positions. So much so that for the first time in three years, speculative shorts on the C$ are now larger than even those placed on the euro.”
We’ll see what observers say Wednesday after the Federal Reserve releases its decision and policy statement. While the U.S. central bank won’t change its key rate, analysts will scour the statement for clues on the timing of rate hikes.
That’s one of the factors in the outlook for the loonie as the Fed is now in the midst of raising rates while the Bank of Canada is expected to take no action for quite some time.
At this point, one analyst has suggested the loonie could tumble to as low as 70 cents, while others put it higher than that, though still under pressure.
“Things could potentially get worse for the Canadian dollar,” said National Bank’s Mr. Rangasamy and Mr. Marion, who for now see the currency bottoming out at 73 cents in the third quarter.
“Souring U.S.-Canada trade relations and the likelihood of tax cuts for American corporations may divert investment away from Canada and towards the U.S. or even encourage Canadian firms to relocate operations stateside,” they added in a report.
“In other words, net foreign direct investment, which has now been negative for three years in a row, is unlikely to improve.”
Having said that, it’s not all “bleak” for the loonie as Canada’s economy improves and the Bank of Canada eventually changes its stance, they said.
And Mr. Rosenberg said he’s also becoming bullish on the currency.