A difficult spot

It is very possible that 2018 will be a rocky year for the Canadian dollar. 2017 has not been a cake walk with headwinds from the possible renegotiations of NAFTA, the breaking down of the correlation with oil prices and the slowing of the impact from the stimulus measures implemented by the then nascent Trudeau government.

Inflation in Canada sits at 1.6%, so below the Bank of Canada’s 2% target and while that is not a materially weak figure in itself markets are pricing in two full 25bps rate hikes in 2018, something that we think feels a little bit rich. A disappointment of these expectations would likely see CAD take a step lower.

Higher inflation is not out of the realms of possibility of course but we think that within a backdrop of slowing growth – as the tailwind from the stimulus plans starts to fade – that this is unlikely. Stronger growth across the border in the United States could drive higher inflation as could stronger spending by Canadian households. On the latter point, consumer credit levels and household indebtedness may impinge the ability of the man/woman in the street to keep spending.

Throw in an overheated housing market, risks to the NAFTA trade deal and overall global trade from a stumble in China and we think that investors are likely to be very reticent to hold on to the CAD next year.

Source: Bloomberg