Loonie’s push past 80 cents may have legs, analysts say, but commodity prices aren’t the driving factor
Analysts predict that an improving economic backdrop and hawkish central bank mean there is more strength ahead for the Canadian dollar
The deputy governor told conference attendees she expects “the pace and magnitude of interest rate increases and the start of (quantitative tightening) to be active parts of our deliberations at our next decision in April,” hinting that policy-makers could end their government bond-buying program.
“The key word in that is ‘magnitude,’ so (what) markets essentially took out of that (is) we could be looking at a 50-basis point move,” Schamotta said, adding that markets had previously priced in a series of nine or more 25-basis point hikes. “They now expect at least one 50-basis point move in the coming months, perhaps at the April meeting, and so that has driven up yields really across the curve and your Canadian two- and 10-year yields now exceed their U.S. counterparts again.”
Schamotta noted that the energy sector, which plays a less influential role in the overall Canadian economy than it once did, is a smaller factor in the loonie’s recent move, as it continues to shed its former “petrocurrency” title.
“The first thing to kind of emphasize is that the energy sector has shrunk in terms of its relevance to the overall Canadian economy,” Schamotta said, adding that consumer spending and investments in housing have played a larger role. “What has happened here is a shift away from market perceptions as the Saudi Arabia of the North…. But we are sort of the housing bubble of the North now, and so I think to some extent, a lot of the trading activity that we see has to do with what investors think is going to happen to lending conditions in Canada to real estate prices and therefore to consumer consumption.”
Earl Davis, the head of fixed income and money markets at the Bank of Montreal, said that despite some short-term volatility due to a pullback in oil prices, he expects that the loonie will continue its hot streak this year.
“You have an economy that’s basically at full employment … and you have you have the backing of the commodity-based economy, so you’ll have cash flows coming in,” Davis said. “So, there’s a lot of things supportive of a stronger dollar.”
Davis also dismissed any potential headwind on the horizon as being more like “breezes,” the biggest of which would be the amount of spending involved in the upcoming federal budget.