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USD/CAD Hits 1-Year Highs, Is 1.40 Next?

By Kathy LienForexDec 27, 2018 04:27PM ET
www.investing.com/analysis/usdcad-hits-1year-highs-is-140-next-200371378
USD/CAD Hits 1-Year Highs, Is 1.40 Next?
By Kathy Lien   |  Dec 27, 2018 04:27PM ET
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Macro

2018 was a brutal year for the Canadian dollar. The currency hasn’t been this cheap since May 2017. Over the past year, the loonie lost more than 7% of its value against the greenback and 10% of its value versus the Japanese yen. At 1.3600, USD/CAD is trading much closer to its 5-year high of 1.4690 than its 5-year low of .9930. The currency’s decline boiled down to 2 things – oil and the U.S. dollar. The price of crude fell 25% last year but from its peak in October, it is down a staggering 44%. The spot price for Alberta oil is down only 18% but that’s only after a sharp recovery in December as it is off 50% from its peak in May. Aside from the decline in oil, the Canadian dollar was also driven lower by U.S. dollar strength.

But it could have been much worse. If not for the U.S.–Mexico–Canada agreement (USMCA), strong labor-market gains and decent growth, the Canadian dollar would be much weaker. The USMCA agreement was the most significant development for Canada last year. It eliminated a major uncertainty that could have been very bad for the currency. It still needs to be ratified and while House Democrats could express some concerns, it will pass in 2019. In the coming year we expect early weakness for Canada’s economy followed by late strength. For USD/CAD, this means that we could see 1.40 before a move down to 1.30.

In the coming year, the same drivers that carried the loonie lower could be the ones that drive it higher – probably not in the beginning of the year but certainly as the year progresses. Oil prices are low but in December OPEC countries agreed to cut production and if prices do not turn higher soon, the threat of further losses will prompt additional reductions. When that happens, the loonie could finally benefit from the falling U.S. dollar. By all counts, the greenback peaked in 2018 and is poised for further losses in 2019. The Canadian dollar was the only currency that failed to benefit at year-end because of oil but as crude prices stabilize, so will the loonie.

MIcro

Starting with the bad news, the first 2 months of the year could be rough for Canada as growth will be dampened by lower oil prices, slowing housing activity and equity market weakness. Despite the USMCA agreement, Canadian steel, aluminum, lumber and solar panel exports are still subject to tariffs, which means these sectors will struggle to recover. According to the table below, consumer spending growth stagnated toward year end, consumer price growth slowed to the point where CPI dropped below 2% and manufacturing activity is well off its highs. Data in the front of the year should be softer, giving the bears more reasons to drive CAD lower.

The good news is that the labor market is very strong with more than 94K jobs created in the month of November. This was the single biggest one-month job gain since April 2010 when 108K jobs were created. The unemployment rate is at a four-decade low and all of this has helped to encourage strong GDP growth. Also, population is growing at a healthy pace and two major liquefied natural gas projects worth $50 billion Canadian dollars could provide some economic momentum mid year. This should be followed by fiscal stimulus ahead of the October general election where Prime Minister Trudeau is expected to win easily.

CAD Data Points
CAD Data Points

Monetary Policy

Like the Federal Reserve, the Bank of Canada is widely expected to raise interest rates this year and the question is just how quickly. The Fed could lift rates again in the first quarter while the BoC could wait until Q2. What’s interesting about the BoC is how quickly their views changed last year. Right after they raised interest rates in October, they said rates will need to rise to a neutral stance to achieve the inflation target and this was interpreted to mean that there could be a December or January hike. However with crude prices falling 44% from October and December and the TSX index falling 14% during this same period, their outlook changed as the risks to growth shifted from the upside to downside. So in December, they find themselves with less wiggle room and like the Fed, they resorted to saying that future moves will be “decidedly data dependent.” This means there are no plans to raise interest rates in the early part of the year, which reinforces our view that USD/CAD is headed higher before it peaks and turns lower.

USD/CAD Hits 1-Year Highs, Is 1.40 Next?
 

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USD/CAD Hits 1-Year Highs, Is 1.40 Next?

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Comments (13)
Bryon Roberts
Bryon Roberts Dec 28, 2018 8:17AM ET
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Great fundamental analysis on usd/cad but technicals point to possible top now:. . https://invst.ly/9m-0l. . Note RSI divergence on daily chart. That link is a camera shot of an https://investing.com chart.
Ray Spencer
Ray Spencer Dec 28, 2018 1:58AM ET
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Technically, I could see the $USD/$CDN retracting to around 1.32 by April/ 2019
Abdul Ghulam
Abdul Ghulam Dec 27, 2018 10:46PM ET
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excellent  ,thanks
Truth Reveller
Truth Reveller Dec 27, 2018 10:38PM ET
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Laughing at everyone who thinks Canada is strong, yet its ready for a financial crisis when the fake stress tests are saying everything is okay, Check the government debt, HELOCs, loans, and credit cards. 40 year low unemployment will soon reverse. The banks employ large % of the population in Canada.. . USDCAD is ready to see 1.60+ like 2002
Paul Hymns
Paul Hymns Dec 27, 2018 7:14PM ET
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how do you make investment in a foregin country?
Curtis James
Curtis James Dec 27, 2018 7:10PM ET
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Anyone selling something thats already down this much took trading classes at Trump University. Fade Cathy most of the time and you should do great. Selling weakness and buying strength is a horrible strategy.
Ty Craig
Ty Craig Dec 27, 2018 6:18PM ET
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It will go to 1.32 first. We're in monthly and weekly supply.
Ty Craig
Ty Craig Dec 27, 2018 6:18PM ET
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While the dollar is in supply.
Oscar Banuelos
Oscar Banuelos Dec 27, 2018 6:09PM ET
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that's good news
Emma Soulsby
Emma Soulsby Dec 27, 2018 5:50PM ET
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Excellent thanks
Dibendu Nag
dibyendunag Dec 27, 2018 5:24PM ET
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We don't think so...!
Moyosore Adegbeye
Moyosore Adegbeye Dec 27, 2018 5:13PM ET
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thank you.
Scott Halverson
Scott Halverson Dec 27, 2018 5:08PM ET
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this is sad
Trader Steve
Trader Steve Dec 27, 2018 5:04PM ET
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Thanks for your usual excellent economic synopsis.
 
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