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Loonie to stay range bound in 2018

Higher oil prices and an expected interest rate rise are keeping the Canuck buck aloft

Following the Canadian dollar’s recent rally it should stay range bound, according to financial analysts.

“It’s a little bit of an exciting story for the loonie. We’re just kind of seeing it range bound but that’s sort of what the fundamentals are telling us,” said Brian DePratto, senior economist with TD Economics.

Over the course of the last month the Canadian dollar has seen a rally against its American counterpart. At the start of December the dollar was sitting at around 77 U.S. cents, and then cracked the 80 U.S. cents mark in January.

According to analysts, the two major drivers of the rally have been higher commodity prices and thoughts the Bank of Canada will hike interest rates Jan. 17.

“We’ve seen a fairly decent recovery in commodity prices… And at the same time we’ve had a pretty solid jobs data, pretty decent economic data overall to close out the year. And so for that reason people have started thinking that the Bank of Canada is going to be hiking sooner rather than later,” DePratto said.

Over the past month the price of oil has rose to highs not hit since May 2015. At the start of December oil prices were below US$60 per barrel, but in January oil cracked the US$60 mark and is now sitting at around US$63 per barrel.

As well, Statistics Canada released strong employment data for the month of December. The unemployment rate hit a 40-year low of 5.7 per cent which helped push the Canadian dollar up.

Most Canadian banks, including TD and Scotiabank, are forecasting a rate increase by the Bank of Canada, which should keep the dollar fairly range bound.

“With the rate increase more or less fully priced in at this point, it’s difficult to see much more upside scope for the Canadian dollar at the moment,” said Shaun Osborne, chief FX strategist for Scotiabank.

However, Osborne said Scotiabank’s economic forecast is already off for 2018, as the dollar has already hit the end of the year target.

“I actually think there’s probably a bit more upside risk over the balance of the year for the Canadian dollar, even relative to current levels. But it’s probably not going to come until we get some clarity on a number of issues,” he said.

Trade is uncertain for Canada as negotiations for the retooling of the North American Free Trade Agreement are ongoing. On Jan. 10 Reuters reported two government sources had told it Canada is convinced United States President Donald Trump will soon announce that the U.S. intends to pull out of NAFTA. This sent the Canadian dollar down to 79.61 U.S. cents.

“There’s significant uncertainty there and obviously on the trade side of things that’s going to be a huge question mark hanging over the loonie,” DePratto said.

As well, it is unknown yet the effect the sweeping U.S. tax reforms which were passed in December will have on Canada.

“Canada does tend to benefit when the U.S. does better. In 2018 we see a pretty decent growth boost in the States. That should translate through into a little more demand for Canadian exports,” DePratto said, adding that could of course be affected if NAFTA ends.

About the author

CNSC

Ashley Robinson writes for MarketsFarm specializing in grain and commodity market reporting.

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