80¢ Canadian dollar suddenly within reach, bank says

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80¢ Canadian dollar?

A foreign bank believes we could soon see a Canadian dollar worth about 80 US cents.

That may not be something Canadian exporters want to see, but it might give summer vacationers to the U.S. a bit of a leg up in buying power.

Olivier Korber, foreign exchange derivatives strategist at Société Générale, made that call after last week’s Bank of Canada rate decision and Federal Reserve chair Jerome Powell’s monetary policy testimony.

What that showed, Mr. Korber said in his latest outlook, is that North American central banks are “definitely out of sync.”

By that he meant that the Fed is preparing to cut interest rates, as early as this month, actually, while the Bank of Canada isn’t expected to change its benchmark rate from its current 1.75 per cent for some time yet.

And it may not cut at all, many observers believe, but rather just sit it out, which would make the loonie more attractive against the U.S. dollar as the Fed ratchets down.

“USD/CAD continues to lag the move in relative rates … and the BoC is definitely out of sync with the Fed, which is securing expectations of the coming easing cycle,” Mr. Korber said, referring to the U.S. versus the Canadian dollar by their symbols.

“With equities shining, a summer move towards 1.25 is possible,” he added, that 1.25 translating to a loonie at 80 US cents.

Bank of Nova Scotia, in turn, says its “fair value model” puts an estimated equilibrium exchange rate nearer to 80 US cents, but its year-end target for the loonie is just above 78 US cents.

“The risk of a more precipitous, general USD decline in the next few months cannot be ignored, however,” Scotiabank said in its outlook.

Muddying some waters here is President Donald Trump, who has been attacking the Fed for not yet cutting rates and has complained the U.S. currency is too high and that certain other currencies, notably the euro and yuan, are too low.

"The president has taken a variety of views on USD since entering the White House but now seems more clearly focused on a weaker exchange rate,” Scotiabank said.

“Investors will also need to closely monitor how this issue evolves in the coming months and whether a lower USD becomes a more or less formal policy objective.”

Senior economist Jonas Goltermann of Capital Economics, in turn, believes the loonie is headed for a fall, along with Norway’s krone, both of which are tied to oil prices.

Mr. Goltermann believes not only that oil prices will ease in the second half of the year, but also that the Bank of Canada will cut interest rates more aggressively than others anticipate.

“The upshot is that we forecast both the loonie and the krone to depreciate against the U.S. dollar by 7 per cent and 8 per cent, respectively, between now and the end of 2019,” he said.

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