Expert Commentary: Canadian Economy and CAD

Latest reports on the Canadian economy showed strong job creation and lingering housing market overheating. These were early signs for a rate hike. In your opinion, should we expect the BoC to raise interest rates? Why?

No, I do expect the BoC to raise rates anytime soon, as there still are some downside risks that the Bank of Canada wants to make sure do not materialise, especially in the US trade policy. Another issue is that inflation is still below the Central Bank's target. There is still time for the excess capacity to be reduced before a rate hike becomes appropriate.

Some experts said that if interest rates remain low it will just encourage buyers to bid up home prices. In your point of view, what should we expect from the real estate market?

I think the real estate market will very likely continue to perform well, especially in some cities like Toronto and, to some extent, Vancouver, because the global growth is accelerating. Those housing markets are in high demand among foreigners: Canada attracts a lot of immigrants, though we are not talking about refugees, we are talking about wealthy foreigners. That one factor generates a lot of investment in the housing market. Currently, there is a limited supply in the market, especially in Toronto, thus, we can expect prices to keep going up.

Analysts suggest that a widening spread between Canadian and US rates may also extend the gap between CAD and USD. Do you share this point of view or not? Why?

I do share this outlook; we expect the Canadian Dollar to continue to depreciate against the US Dollar, as we anticipate the Federal Reserve to announce more rate hikes this year. At the current moment, we expect two rate increases in the second half of 2017. Furthermore, we see the Federal Reserve beginning to reduce their balance sheet, whereas we do not expect the Bank of Canada to be hiking rates before April 2018. Against the background, all these milestones will continue to put downward pressure on interest rate differentials and, by consequence, the Canadian Dollar should continue to weaken.

What will be the major drivers for the Loonie in the near term?

Traditionally, the big driver is crude oil prices. We expect crude oil to finish the year 2017 at $60 per barrel. We do not eye much weakness in crude prices, as global growth and global demand for oil is picking up, which will be supportive of oil prices. Meanwhile, there is also a possibility of geopolitical tensions supporting oil prices, but at the same time there is supply coming from the US that will limit the potential for oil to move higher. That in isolation would cause the Canadian Dollar to appreciate, but we expect the rate differential factor to be dominant. As a consequence, we see the Canadian Dollar edging lower by the end of the year.

What are your forecasts for EUR/CAD and USD/CAD for the same period?

We expect the USD/CAD currency pair to trade at 1.39 by the end of 2017. With respect to the EUR/CAD, our year-end forecast stands at 1.42.

Jimmy Jean 

Senior Economist at Desjardins Capital Markets