The Canadian dollar has emerged relatively unscathed from the collapse in crude oil prices over the past few months, and has even managed to enjoy a mini-rally amid the lockdown carnage.
But that’s about to come to an end.
The Canadian dollar gave up some of its gains against the greenback last week, falling 0.5 per cent to 1.40, or 71.30 U.S. cents, on Friday. This morning the loonie was trading 0.11 per cent higher to 71.48 U.S. cents, but there is near- universal consensus that there is weakness ahead for the Canadian dollar.
“We are looking for one more phase of Canadian dollar weakness as we go through Q2 and into Q3, looking for the U.S. dollar to move towards 1.43 (69.9 U.S. cents) against the Canadian dollar,” said George Davis, RBC Capital Markets’ chief technical strategist in foreign exchange trading, in a podcast posted by the bank.
RBC expects Canada’s GDP to contract a jaw-dropping 40 per cent in the second quarter, which would trigger a loonie decline in the medium-term, although a rebound in the third and fourth quarter would likely be supportive.
“It’s probably not going to be a quick, sharp V-shaped type of recovery that people were expecting initially, and so there’s likely going to be a few setbacks along the way, and that will lead to some new Canadian dollar weakness,” Davis said.
By next year, the C-dollar could claw its way back to 1.35 (74 U.S. cents) but there are a number of headwinds ahead, including the U.S. presidential elections.
“With both Trump and Joe Biden seen pro-economy, they will likely both be positive for the U.S. dollar, with Trump having a slight edge,” Davis said. “It will be the bearish for the Canadian dollar.”
Veteran analyst David Rosenberg, who has been bearish on the loonie for some time, says the Canada Mortgage and Housing Corporation’s prediction that home prices could contract 18 per cent could set to unleash dollar weakness.
“I can also tell you if Canadian Mortgage and Housing Corporation is prescient in its forecast for an 18% plunge in Canadian home prices then there is no chance the Canadian dollar will be anywhere near C$1.40 which it just touched in renewed bearish fashion. Sell, Mortimer!,” he said in a tweet.
The Rosenberg Research founder said investors may be underestimating the impact of a property market plunge on the domestic household sector that’s overextended on residential real estate.
Real estate is valued at $2.5 trillion, “which is over 100% of GDP, and it would approximate a $500 billion hit to the ‘wealth effect’ on spending, not to mention increasing financial strains given the record $1.5 trillion mortgage debt outstanding,” Rosenberg said in a note to clients.
While the loonie has rallied in tandem with resurgent oil prices, the commodity rally is vulnerable, especially as U.S.-China tensions hover over the horizon.
“Markets could be pricing in slightly too much optimism as of right now,” said Avery Shenfeld, chief economist at the Canadian Imperial Bank of Commerce.
“As the reality of depressed equity earnings, and the limitations on the recovery by the potential for a second wave set in, that would see a stall in oil’s rebound, allowing USD/CAD to reach 1.41 by June and ending Q3 at 1.43 (69.9 U.S. cents),” Shenfeld said in a note.
Canada’s weak trade record in the last cycle also points to the need for a more competitive exchange rate in the longer-term, as the economy weans itself off of debt-financed consumption and housing as sources of growth, Shenfeld said.
“Look for USD/CAD to still be hovering around 1.41 by the end of next year, held back by the country’s trade imbalance.”
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MILLENNIAL MONEY: Spent is a new column in which the Financial Post’s Victor Ferreira takes an entertaining and insightful look at the financial lives of everyday Canadian millennials. Some toil in lower-paying jobs while others are earning six-figures — what unites them is their desire for more and their everlasting struggle to get it.
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In this week’s column, a millennial is dreams of moving out of his dad’s house and leaving the city by banking his CERB cheques. Full column here. Illustration/Brice Hall
- In his last week on the job, Bank of Canada governor Stephen Poloz gives the University of Alberta Eric J. Hanson Memorial Lecture by videoconference
- U.S. markets are closed for Memorial Day
- Joyce Murray, Minister of Digital Government, appears before the House of Commons standing committee on government operations and estimates to discuss the federal response to the COVID-19 pandemic
- Cullen Commission, inquiry into money laundering, hearings into an overview of the problem, attempts to quantify the extent and regulatory models
- Scotiabank and National Bank will kick off earnings seasons for the big Canadian banks on Tuesday
- Stocks gain as German survey fuels optimism; dollar firm
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- Boeing says it will reduce workforce by 400 in Winnipeg due to impact from COVID-19
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- Excitement, nervousness among Montreal retailers preparing to reopen
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- China warns Americans are pushing countries toward ‘new Cold War’
- Here’s all the financial relief the government is offering seniors and what might be on tap
- Rules for Toronto’s bankers: Book an elevator ride, wear a mask
- Cruises are coming back. Here’s what they’ll look like
Retail sales plunged 10 per cent in March when widespread physical distancing measures first took effect. Statistics Canada said preliminary data indicates the decline will be even steeper in April, with early figures suggesting a decline of 15 per cent.
However, the so-called ‘sins’ categories were up rather smartly. Booze sales advance by 17.5 per cent month-on-month and cannabis stores registered a 19.2 per cent m/m gain (the latter is not seasonally adjusted due to a lack of history).
“Apparently the munchies may have helped food sales!,” writes Scotiabank.
Recent stock market volatility has put a spotlight on daily market movements for people who would not normally pay such close attention to their portfolio. Setting appropriate expectations about investment returns is important for investors and advisors. These expectations depend on several factors and impact investment and financial planning decisions, writes Jason Heath.
Today’s Posthaste was written by Yadullah Hussain (@Yad_Fpenergy), with files from The Canadian Press, Thomson Reuters and Bloomberg.
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