Posthaste: Look for the Canadian dollar to be an ‘underperformer’ once the war winds down, says CIBC

Wells Fargo is calling for the loonie to trade at 72.5 cents U.S. during the second quarter. Photo by Peter J. Thompson /Financial Post

Article content

Article content

The Canadian dollar has rallied after falling by two per cent during March, but many currency watchers aren’t convinced it has enough tailwind to recoup those losses.

Article content

Article content

The loonie has been struggling mightily in recent weeks considering the scope of oil price increases, Erik Nelson, an analyst at Wells Fargo & Co., said in a note on Wednesday.

Article content

He said the reasons for those struggles include a weaker outlook for growth and lower expectations around interest rates compared with, say, Great Britain and the eurozone.

Article content

Article content

“These central banks have seen greater repricing toward hikes in the last month,” he said in an email.

Article content

Article content

Markets are pricing in one 25-basis-point hike in Canada, with bets near 70 per cent for a second hike this year, but are fully pricing in two hikes in the eurozone, according to overnight index swap data from Bloomberg.

Article content

In the early days of the United States-Israel-led war on Iran, the loonie strengthened against its American counterpart on spiking oil prices. That trade was clipped as the war continued and investors fled to the safety of the greenback, boosting the U.S. dollar index by 2.4 per cent last month.

Article content

On Wednesday, the Canadian dollar made some progress in turning around last month’s slide, gaining nearly a quarter of a per cent to peek above 72 cents U.S., after topping out in March at 73.7 cents U.S.

Article content

Sentiment began to reverse on news that U.S. President Donald Trump was considering ending the war in the next two to three weeks though in a televised address on Wednesday evening he added that Iran would be hit “extremely hard” during that period.

Article content

But even with U.S. dollar pressure abating, Nelson said the loonie could be in for a rough ride.

Article content

Article content

“The second quarter could still be a bumpy ride with (the) labour market still on shaky footing and (Canada-U.S.-Mexico Agreement) uncertainty still lingering,” he said, in the note.

Article content

Wells Fargo is calling for the loonie to trade at 72.5 cents U.S. during the second quarter.

Article content

CIBC Capital Markets also doesn’t expect a significant uptick for the Canadian dollar in an end-of-war scenario and foresees the loonie holding around 72 cents U.S.

Article content

Geopolitical sentiment has really driven currency action, benefiting the greenback the most, Sarah Ying, head of FX strategy in fixed income, currency and commodities at CIBC Capital Markets, said.

Article content

“In an end-of-war scenario, we suspect this geopolitical risk premia is unwound. However, opposite that is oil prices selling off, which will weaken the (Canadian dollar) leg,” she said in a note on Monday, adding she expects any oil price correction would be “rather sharp.”

Article content

Ying said once the war is wound up, investors will likely turn their attention back to the Canada-U.S.-Mexico Agreement review that is hanging over the Canadian economy, “deteriorating” economic fundamentals and sluggish business investment.