BNP Paribas FX strategist Vassili Serebriakov said that while the recent surge of the Canadian dollar is certainly surprising, the “tailwinds” that the currency has enjoyed in the past few months are starting to weaken.
“I’m thinking primarily of oil prices; we’ve had kind of a significant rebound in crude oil. We think that at these levels—around $45 a barrel—we have to ask ourselves, ‘Are these levels going to draw back with increased production from the U.S.?’” Serebriakov said in an interview with BNN
“If we see increased production from the U.S., that’s a sure way oil prices and oil would reverse some of [the loonie’s] recent gains,” he added.
Serebriakov noted that the Canadian dollar being overbought right now, in contrast with its being oversold at 68.5 cents last January, points at a trend towards gradual correction to more sustainable levels.
“I don’t think we’re going back to below 70 cents; I think those levels look pretty extreme now,” the analyst said. “In our view, [the loonie] can go back down to around 75 cents.”
“If you think about which currencies [are best] to own, the Canadian dollar doesn’t seem to offer that much, so we’re kind of doubtful that the market will go very bullish on the currency. The tailwind from positioning is already over,” he stated.
A side effect of the loonie’s volatility is that the Bank of Canada’s fiscal spending plan, while lauded as a much-needed stimulus, would not feed into economic growth as fast as the Bank might expect. Serebriakov warned that the economy can tolerate only so much movement in the currency.
“There’s also a point where you’d ask, ‘How strong can the Canadian dollar get before it starts hurting the economy and starts hurting exports?’” the strategist said. “I think the strength and the currency itself is a factor, and there’s a feedback loop from that into the economy. And that’s where we’re really starting to get worried about.”
“I don’t think it’s overwhelming, and I don’t think it’s immediate. But there is some kind of threshold beyond which we think it’s self-defeating for the Canadian dollar to strengthen further,” Serebriakov concluded.
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With the Canadian dollar reaching 10-month record heights, optimistic projections of a stronger currency and economy abound, but an analyst cautioned that the loonie remains vulnerable to correction due to the interaction of various market forces.