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Mar 16, 2018

‘Creeping uncertainty’: What’s weighing on the dollar, and how low it could go

Why this FX strategist has a cautious outlook on the loonie


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The Canadian dollar hit its lowest level in more than eight months Friday after a week filled with growing trade tensions, a dovish Bank of Canada speech, and weak domestic data.  

The loonie was at 76.37 U.S. cents at the close of Friday's trading, compared with its year-to-date high of 81.52.

There were a number of reasons for the currency’s slide in the past week. Governor Stephen Poloz reiterated in a speech Tuesday the Bank of Canada would remain cautious on future policy moves. Meanwhile, trade tensions with the United States continued to brew as NAFTA uncertainty looms large. And on Thursday, the Canadian Real Estate Association reported lower Canadian home sales in February – the same day the latest debt reading showed Canada’s household debt-to-income ratio is near a record high.

Below, BNN breaks down some of the factors contributing to the loonie’s recent fall and what experts are saying about the outlook.


Loonie hits lowest level since June amid trade concerns

The Canadian dollar fell to its lowest level since last June on Friday as a host of factors weigh it down, including concern about fallout from NAFTA talks. Michael Scanlon, managing director and portfolio manager at Manulife Asset Management, joins BNN’s Jameson Berkow to discuss.


"Over the last couple of weeks, as we've seen the proposals for some of these tariffs come into play, there has obviously been a lot of concern over the potential impact as NAFTA is being renegotiated."

-Michael Scanlon, managing director and portfolio manager, Manulife Asset Management

“All commodity currencies slumped a bit this week, partly on concerns over a brewing global trade tiff, as well as supportive U.S. dollar comments from Trump’s new economic advisor, Larry Kudlow.”

– Doug Porter, chief economist, BMO Financial Group

“I think it’s creeping uncertainty about all these negotiations.”

-Tom Caldwell, chairman, Caldwell Securities

“The issue, of course, over the last 24 hours has been sort of a re-escalation of tensions around trade. More tweets coming out of the Trump White House really threatening Canada with big downside here. And that is combined with very weak housing data [Thursday] to really drive the Canadian dollar below a key resistance point. … We are probably going to see weakness down to something like 74 [cents US] at some point.”

-Karl Schamotta, director of FX Research, Cambridge Global Payments


NAFTA's demise could have long-term benefits that aren't being priced in: Currency strategist

Karl Schamotta, director of FX research at Cambridge Global Payments, joins BNN to provide perspective on where the Canadian dollar is headed next as it falls below 77 cents US.


“I would suggest that the single biggest factor [for the lower loonie] is the shifting outlook on the Bank of Canada’s interest rate policy. The combination of a relatively dovish speech by Governor Poloz and some soft domestic data (weak home sales, easing household debt, and drooping manufacturing sales) dim the chances of any near-term hike by the [bank], at the very time when the market is upgrading the amount of expected Fed tightening this year.”

– Porter


Rosenberg: Poloz's latest economic commentary 'cherry on the cake'

Bank of Canada Governor Stephen Poloz spoke in Kingston on Tuesday, a week after his decision to hold the central bank's key interest rate at 1.25 per cent, saying that the Canadian economy has room to grow without stoking inflation. David Rosenberg of Gluskin Sheff + Associates offers his take on Poloz's comments and the health of the Canadian economy.

“If the bank stays on the sidelines and the Fed goes as planned, or even more, that alone is going to drive the Canadian dollar lower at some point. … I think the Canadian dollar is going to weaken and had been weakening absent what Stephen Poloz had to say [Tuesday].”

– David Rosenberg, chief economist and strategist, Gluskin Sheff + Associates


“I think for international investors, the focus on the domestic housing sector here has been an issue that’s kind of come and gone for the Canadian dollar over the past few years. I think specifically this week, it has been more about the trade issues, the comments from Governor Poloz earlier in the week, the focus on President Trump’s comments that has really driven the Canadian dollar lower. …In the short-run here, it looks like we may head a little lower still. … Anyone looking to go on vacation, actually it’s looking pretty expensive in most parts of the world these days for Canadian travellers.”

-Shaun Osborne, Chief FX Strategist, Scotiabank


What's behind the loonie's recent struggles

Shaun Osborne, chief FX strategist at Scotiabank, joins BNN to discuss the headwinds that have recently plagued the Canadian dollar.

“The thing I think that people should think about here is not so much that house prices are falling or that activity is slowing. The issue here is that the credit cycle is rolling over. Lending to Canadians is falling off. And as that falls off, the Canadian economy is bound to suffer.”

- Schamotta