The Canadian dollar is looking good

But its bullish run may soon run out of fuel
Chief Investment Office15 Apr 2019
Photo credit: AFP Photo

A surge of more than 40% in oil prices has helped make the Canadian dollar one of this year’s best-performing major currencies. That resiliency could soon be tested if crude loses momentum.

Many forecasters appear sceptical about the prospects for oil to advance much beyond its current level, potentially sapping some support from the loonie. West Texas Intermediate was at around USD64.00 per barrel on Friday (12 April) and the median forecast in a Bloomberg survey is for it to end the year around USD63.00.

The Canadian dollar has advanced 2.4% this year against the US currency, trailing only the British pound among its G-10 peers. Oil has provided some buoyancy, but Canada’s domestic picture has been more cloudy. There is mounting concern about household indebtedness, home prices are dropping, and growth practically ground to a halt in the final part of 2018.

While growth numbers for January were more upbeat and unemployment remains close to multi-decade lows, the central bank has become more circumspect. Bank of Canada (BOC) Governor Stephen Poloz this month suggested that he is settling into a holding pattern on interest-rate policy. The global slowdown, coupled with a housing sector that is taking longer to adjust to tighter mortgage rules and higher rates, means the economy still needs the help of low borrowing costs, the BOC boss said.

“Canada’s got to worry about an additional factor that the US doesn’t at this point, and that is the fact that our household sector is extremely leveraged,” said a Toronto-based strategist. “It could prove to be a much more prolonged slowdown given that you may see households deleveraging.”

Not all observers are so pessimistic though. Some market watchers see a weak greenback environment fuelling commodity-price gains and boosting Canada’s terms of trade, and say there is room for improvement in the currency if crude prices continue to rise. – Bloomberg News.

The US Dollar Index (DXY) fell 0.21% to 96.972 on Friday (12 April). The euro was 0.41% higher at USD1.1299. The pound gained 0.12% to USD1.3074. The yen weakened 0.32% to 112.02 per dollar.

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