One FX strategist says he expects the Canadian dollar to be trading around 72 cents U.S. around the end of the year, adding the loonie is currently trading near that level.
Shaun Osborne, managing director and chief FX strategist at Scotiabank, said in an interview with BNN Bloomberg Friday that markets are in an “unusual situation.” He said there has been a recent trend of broader weakness in U.S. assets including equities, bonds and the greenback.
“That’s kind of unusual for markets generally because typically when we see, for example when equity markets weaken, the U.S. dollar as a safe haven asset, typically…it strengthens in response to those kinds of situations,” Osborne said.
He said this atypical trend has played out this week and is particularly meaningful for Canadian investors who have a U.S. dollar denominated portfolio. For those investors, he said when equity markets fall, they typically get a “bit of a cushion” from the weakness due to a strengthening in the U.S. dollar.
“We’re not seeing that right now. The Canadian dollar is actually strengthening, typically when we’ve seen equity markets, weaken. That actually amplifies the negative return that Canadian investors would feel from the U.S. stock portfolios if they’re not hedged for FX risk,” he said.
Over the short term, he said the Canadian dollar may “pick up a bit of ground.” The Canadian dollar was trading around 73 cents U.S. on Friday afternoon.
“We are looking for end of year forecast of 72 cents for the Canadian dollar, but we’re already trading very close to that right now. And in the short run, it does look as if the Canadian dollar may pick up a bit more ground, a reflection of general U.S. dollar softness,” Osborne said.
“We can see that there’s been a pretty big shift in market sentiment regarding the dollar outlook over the last little while, and that includes the Canadian dollar outlook. So, it does appear as if we’re moving into a new higher range for the Canadian dollar, at least in the short run, that may be something in the range of 72 to 74 cents.”
Osborne said that generally, when the U.S. dollar has underperformed it is due to “big structural challenges” that have occurred over the past 30 to 40 years, mostly being issues related to deficits.
“So big deficits usually worry investors and that has in the 80s and particularly in the early 2000s, twin deficit story was a big driver of dollar weakness,” he said.
