Good morning!
The Canadian dollar has lost some momentum against the U.S. greenback falling 2.5 per cent this month, but it remains up around 3 per cent since the start of the year.
The loonie was trading a tad higher to 1.339 against the U.S. dollar, or 74.66 U.S. cents, this morning, clawing back some of the gains after falling to a 7-week low at 1.3418 late last week.
The Canadian Imperial Bank of Commerce expects the loonie to rally again, especially as political turmoil hits the U.S, but warns that it’s going to be a temporary blip.
“Moves in the greenback will continue to dominate CAD momentum for the remainder of the year,” CIBC economists Katherine Judge and Avery Shenfeld said in a note to clients Tuesday. “On that score, we see scope for the USD to give up some of its safe-haven bid by the end of 2020 after a period of election-induced volatility. That could leave CAD slightly stronger to end the year, with USDCAD at 1.33.”
For now, all eyes are on the U.S. dollar in light of the political circus unravelling in the U.S.
If Tuesday evening’s acrimonious presidential debate between U.S. President Donald Trump and former vice-president Joe Biden is anything to go by, it is going to be an ugly contest with a disputed election result that could leave the U.S. economy in limbo for months. Global equity markets are also lower this morning, stunned by the quality of debate on display by two candidates looking to lead the world’s most powerful economy.
But the Canadian economy has its own headwinds that could weaken the currency. Crude oil prices, a key driver of the Canadian dollar, have been in a funk for months and a second coronavirus wave could further depress global oil demand and send commodity prices reeling further.
This morning, Statistics Canada will also post Canada’s GDP data for July that could determine the loonie’s trajectory. TD Bank expects July GDP to rise 2.5 per cent, which would still leave economic activity 6.5 per cent below levels seen in February.
“Goods-producing industries will be led by another solid increase in manufacturing and residential construction while energy should provide a slight offset, with monthly crude-by-rail exports falling to their lowest level since 2012. Service sector growth will be weighed down by the muted performance in retail trade, but a record month for real estate transactions and continued recovery in restaurant spending will help support growth,” TD said in a report earlier this week.
Earlier this month, TD noted that the the loonie is trading “right around its fair value,” and more evidence of economic growth outperformance will be needed or another leg up in commodity prices to justify higher valuations for the currency.
In addition, Canadian trade flows are also expected to weaken and once the dust settles on the U.S. election, traders will turn their attention to trade deficits. Canada posted a trade deficit of $2.45 billion in July.
“In 2021, trade fundamentals should come into focus,” CIBC economists wrote. “A long run of red ink on trade suggests CAD is clearly overvalued, especially relative to trading partners apart from the U.S. The BoC has room to nudge the C$ weaker in 2021-22 by correcting the market’s current impression that it will hike ahead of the (U.S.) Fed(eral Reserve).”
