NBF Economics and Strategy team note that downside risks to the Canadian economy have increased amidst an apparent deterioration in the trade relationship with the U.S., and argues that the Bank of Canada may now be more cautious in its approach to monetary policy normalisation.
Key quotes
“We have tweaked our near term Canadian dollar forecasts to reflect ongoing headwinds brought by U.S. protectionism, but are keeping unchanged our longer term projections which show a strengthening loonie on the assumption of an eventual deal on trade. As such, our new target range for USDCAD for the next 12 months is 1.25-1.35.”
“The US dollar continues to benefit from tighter Fed policy and safe haven flows amidst growing investor concerns about trade protectionism. With America’s trade partners including the European Union, Canada and China set to respond to latest U.S. trade barriers with retaliatory tariffs of their own starting in July, the world is indeed getting dangerously close to a full-blown trade war. As such our assumptions of a resolution and hence unimpeded trade flows will be severely tested over the coming months. If we’re wrong about policymakers being able to put economics ahead of politics, the USD will fare better than what’s currently shown in our forecasts.”
“The European Central Bank’s announcement that it is ending its asset purchase program in December failed to lift the euro, with investors seemingly disappointed about interest rates which the ECB says will remain unchanged until at least the summer of 2019. But don’t rule out a more hawkish tone from Frankfurt should the zone’s economic fortunes improve and trade-related uncertainties dissipate. We continue to expect the common currency to bounce back later in the year.”
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