The loonie took a hit after the Bank of Canada struck a neutral tone and held its interest rate steady at 1.75 per cent, but recovered its momentum by late afternoon to trade above 76.5 cents to the U.S. dollar.
Mackenzie Investments chief economist and strategist Alex Bellefleur suggested the currency initially lost steam because investors may have been expecting the Bank of Canada to strike a more hawkish tone. The statement was ultimately a neutral one, but Bellefleur believes investors may have initially put more emphasis on the language surrounding trade tensions.
“The reason for the drop is perhaps the market may have been bracing for a more hawkish statement that would’ve put slightly less emphasis on trade and things like this,” he said. “If the Bank of Canada had been more forceful … I think that’s what the market was looking for.”
The BoC’s forecast for economic growth in 2020 was cut to 1.9 per cent from 2.1 per cent. And although trade tensions cloud the future, inflation is on target, the housing market is stabilizing and the central bank believes the economy appears to be returning to potential growth despite lowered projections.
The loonie has been rallying since June when U.S. Federal Reserve Chair Jerome Powell struck a dovish tone during a monetary policy update and strongly signalled an upcoming rate cut. Within days, the loonie jumped to more than 76 cents US from about 74 cents US.
On Wednesday morning, Powell once again struck a dovish tone while testifying in front of U.S. Congress.
BMO senior economist Robert Kavcic said two interest rate cuts are already being priced into U.S. markets. It does not appear the Bank of Canada will immediately follow suit, which would create an environment that some economists said may lead to the Canadian currency strengthening to 80 cents US.
A rally might put Bank of Canada Governor Stephen Poloz under pressure to make a cut quicker than expected, Kavcic said, due to concerns about exports. Poloz addressed that scenario at a press conference Wednesday, saying that a stronger dollar reduces Canada’s cost competitiveness in international markets and could slow export projections.
Current export projections are based on a valuation for the loonie of around 75 cents US, Poloz said, and there would be little impact on them if the currency trades between 74 and 78 cents US. He refused to provide a valuation for “when it begins to hurt.”
Kavcic said that number is likely around the loonie’s fair value: between 80 and 83 cents US. Still, neither he nor Bellefleur foresee the currency reaching that trading level.
Bellefleur projects that the loonie could trade around 78 cents US, while Kavcic has the loonie staying flat in 2019 and potentially reaching 77 cents US by the end of 2020.
“The Fed can go ahead and cut rates twice while the Bank of Canada sits there and you may not have a move in the Canadian dollar because the markets have already factored that in,” Kavcic said. “It could take a lot more than that to push the currency above 80 cents.”
Copyright Postmedia Network Inc., 2019