Four reasons the Canadian dollar has risen from the dead

The Canadian dollar was on a tear Friday morning, and though it later pared gains, it’s been a banner week for the loonie.

As BMO chief economist Douglas Porter points out the currency just racked up its best weekly gain in four years, up 3% from last Friday’s close. Its performance so far this month has ranked it the best performer of its developed nation peers.

So what gives? Not so long ago (March 18th to be exact) the loonie dove to a six-year low of 78 US cents — the latest decline in a nine-month swoon that has seen the currency lose 16 per cent against the greenback.

Porter credits four separate, but related events that have come together “in a one-week blizzard of helpful news for the previously beleaguered bird.”

The trick, he wrote in a note Friday, is to figure out whether the life is just temporary or whether the currency has turned a corner.

Here is what moved the loonie this week, and Porter’s assessment of whether it will stick around:

1) Oil is up: While the 50% plunge in oil prices since last June was the main culprit in the loonie’s decline, so is oil’s rally this week behind the dollar’s rally. Crude has had its ups and downs lately but the WTI is still up 8% on the week, with the Brent making similar moves.

Sustainability: “Moderate. While there have been some hopeful supply and demand developments in recent weeks, we would be cautious on the near-term oil outlook, and would note that there have been false dawns before on this front. Still, it increasingly looks like oil has put in a bottom, and the bad news is already built into the currency,” writes Porter.

2) A less dovish Bank of Canada:“Any sign that the BoC is starting to pull back from its dovish tendencies is good news for the C$, and we saw a big dose of that this week,” writes Porter. Bets on another rate cut anytime soon tanked this week after the Bank said the oil shock wasn’t going to be any worse than it thought and the output gap would close by late 2016. A surge in inflation and retail sales Friday bolstered that outlook. A week ago, the market was fully priced for another 25 bp cut; those odds are now at less than 50%, said Porter.

Sustainability: “High. We can’t shut the door on the BoC delivering another shock, but this factor looks more sustainable. We doubt the Bank will cut again.”

3) A softer US$: A big reason the Canadian dollar has gone so low is the American dollar has gone so high. The greenback has been a tear, crushing everything from the loonie to the euro to the Brazilian real in its path. Lately that momentum has stalled in the wake of less than stellar U.S. economic data and signals from some Fed officials that a June rate cut might be too soon.

Sustainability: Low. We believe the soft patch in U.S. growth is just that—a patch. With the U.S. economy expected to rebound and the Fed still poised to start tightening by September, the greenback is likely to resume its rise before long.

4) Stronger Canadian economic data: After a bad start to the year, Canada’s economic performance has picked up. Last week’s surprise job gains, this week’s robust home sales and today’s surprise gain in retail sales, up 1.7% have all brightened the picture. The spat of good news could mean just a small decline in February GDP and keep growth in the first quarter flat (rather than in the red), said Porter.

Sustainability: “Moderate. We do believe the economy was pounded by a variety of temporary factors early in the year, and will see some better data as we move through the spring and summer.”

So what’s the bottom line for the loonie’s fortunes. Porter believes some of the movers this week will stick around and keep the Canadian dollar higher, for the near term at least.

“The biggest wild card remains oil; if its recent rally is for real, and builds further momentum, the Canadian dollar outlook will move in lockstep,” said Porter.

In fact, the economist notes, for every $10 oil moves, the loonie moves roughly three to five cents in the same direction.

 

Source: Financial Post

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