© Charles St Arnaud
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I think the likelihood of a rate cut could be as high as 40%; however, I would caution that it is more a question of not oil prices or the level of the currency, but actually the weakness in the non-energy exports sector, which is the biggest concern for the Bank of Canada at the moment. Non-energy exports have peaked earlier this year and have been declining since; so, in terms of exports level, we are now back to where we were around May 2015, which, in turn, has been causing a big drag on growth.
What is more, given the Bank of Canada has the expectation that a pickup in non-energy exports will be driving growth in the second half of the year, the recent momentum does not suggest that we will have the push for stronger growth in the second. Thus, if we do not see this pickup, the Bank of Canada will be probably forced to provide some stimulus to the economy.
Canada's Prime Minister, Justin Trudeau, is visiting China this week with a pledge to deepen trade and investment ties between two countries. In your point of view, what will be the outcome of this visit?
I do not want to speculate on what will happen, but, obviously, Canada has seen increasing ties with China in recent years; nevertheless, those ties remain relatively weak. I think the statistics is that roughly 7-8% of Canadian exports go to China, compares with 75% that goes to the US. Against that, there is a need in for Canada to diversify in some way and try to benefit from stronger growth in the Asian region.
What will be the major drivers for the Loonie this year and what are your forecasts for EUR/CAD and USD/CAD for the same period?
In terms of drivers for the Loonie, our expectation is that the Federal Reserve will hike rates by the end of the year. While this is not yet fully priced in currently by the market, we believe that should give some positive momentum for the US Dollar and allow it to appreciate. On the flipside, Canada is also facing some headwinds coming from relatively weak exports sector, which should also put some weight on the Canadian Dollar. Hence, our end-of-the-year forecast is that the USD/CAD currency pair should trade at roughly 1.34. Against the Euro, the Loonie should finish the year at 1.05. On that side we have higher yields than the US, but, on the flipside, we expect the ECB to cut rates again and also to improve the QE programme, which would be negative for the Euro.