The worst for the Loonie now appears to be behind

Colin Cieszynski, Senior Economist at CMC Markets, on Canadian economy and Loonie

Lower oil prices have dampened the overall sales outlook for Canadian companies and have weighed on their investment and hiring intention. However, many economists expect to see benefit from a stronger U.S. economy, according to the recent survey of Bank of Canada. Do you believe the mentioned negative effects will not last long?

I believe the worst of the effects will be temporary. We can see what is happening in Canada with the oil prices crush, which impacts the regions of the country. Obviously, oil producers will cut back their spending and people will get a lot of layoffs. The negative factors hit first and they hit very quickly. The benefits, however, take a little bit longer to work out under the system, which is lower energy cost. Moreover, the lower Canadian Dollar helps other parts of the economy, such as manufactures, other exporters, as well as tourism.

The weaker Dollar has its benefit, but it takes longer for the advantage to be seen, whereas, the negative impact tends to be frontloaded. In the short term Canada has taken quite a hit from the falling oil price, but I expect the economy to improve over the longer term.

There are talks that Canadian central bank will eventually join its global peers by cutting the interest rates to zero to revive flagging output. Investors are betting on one more rate cut this year on April 15. However, analysts believe that it will probably not be enough for Canada to avoid becoming mired in weak global demand like the other major economies have. Do you consider them to be right?

My anticipation on the Canadian economy right now is that I do not suppose the Bank of Canada will go to zero. In the financial crisis in 2008 they went down to 0.5% and stayed on the same level. Moreover, officials did not launch stimulus, and I expect the BoC will continue on that course, trying to avoid Quantitative Easing as long as it is possible and keep interest rates positive.

However, I believe there is room for one more interest rate cut. Governor Poloz has suggested the rate cut did help to manage the economy through this low patch between the upfront costs of the lower oil price in the long term benefits. Officials are still trying to manage it, unless we see a really big pullback in Canadian jobs and employment report. I do not think they will cut interest rates again this month; they rather would hold off until at least their next meeting, where they are weighing and continuing to access the damage.

Cheaper oil has also hurt the Loonie, and exporters to the US have cited it as another reason for cautious optimism about sales. How do you think the situation will influence the Loonie performance further?

The worst for the Loonie now appears to be behind, which is similar to crude oil. Currency headed its weakest performance with between August and the end of January. However, since the end of January the Canadian Dollar has flattened out, and it has basically gone sideways. Unless we see another lock down for crude oil, it does look like the Loonie is trying to bottom out from here: 0.78 to 0.82 range for the CAD/USD or about 1.24 to 1.28 for the USD/CAD. The CAD is in the range and it wants to hold there in the near term, unless we see a significant move from the crude oil price to trigger out.

What are your forecasts for USD/CAD and EUR/CAD for the end of Q2 and in the long term?

We see the USD/CAD for the Q2 to be about 1.26, which is the mid-point of current 1.24-1.28 range. I believe we could expect the Canadian Dollar down around 1.23 against the Greenback by the end of the year. Talking about the EUR/CAD currency pair, we see the Loonie appreciating against the EUR/USD, since the ECB started its stimulus programme. Thus, the Canadian Dollar obviously is doing a little bit better compared to other majors.

For the Q2 I anticipate the EUR/CAD to be at around 1.30 levels, since I believe the Euro is going to continue weakening. For the end of the year we see the pair trading at 1.25 levels.