FCC Sees Loonie Below 2017 Average

Farm Credit Canada (FCC) is forecasting the Canadian dollar will spend this year around 75 cents US, a level which should help support domestic farm profits.

“We're going to see volatility throughout the year obviously but when we look at that season, or the full year average, we're looking for it to be right around that 75 cents,” said Craig Klemmer, principal agricultural economist at FCC.

If accurate, that would be down slightly from the dollar’s 2018 average of 76 cents US.

A weaker loonie raises the price Canadian producers receive for commodities that are initially priced in U.S. dollars. It also makes Canadian commodities more attractive to buyers relative to competitors. In general, Canadian agriculture remains competitive with an exchange rate of 80-85 cents US, according to FCC.

“That's going to give us a little of a competitive advantage on the returns for our pork and beef exports, as well as our grain and oilseed and pulse exports, and those will help to improve, or help support Canadian agriculture,” Klemmer said.

The spot Canadian dollar is currently trading around 75.5 cents US.

FCC is basing its dollar forecast off expected crude oil prices and interest rate spreads between the U.S. and Canada.

Oil has shown some signs of life through the early stages of 2019, but still remains well down after experiencing an approximately 25% fall through the final quarter of 2017. As one of Canada’s primary exports, the price of oil helps to determine the direction of the loonie.

On interest rates, Klemmer said FCC is projecting the Bank of Canada will phase in interest rate increases more gradually than its American counterpart. He said one to two rate increases is possible in Canada this year, versus two to three increases in the U.S.

A stronger move toward rate increases in the U.S. would help support the greenback versus the Canadian dollar.

(The Bank of Canada’s key overnight lending rate currently stands at 1 ¾%, compared to the Federal Reserve rate of 2 ¼ to 2 ½%).

A wild card in terms of the dollar remains the global trade. The U.S. and China wrapped up talks this week aimed at settling their ongoing trade dispute – which has roiled world markets – and Klemmer said FCC will be paying close to attention to how things eventually play out.

“We're going to continue to be monitoring how those relationships are through 2019. And we do see a thawing in that relationship and that's going to help the markets out moving forward in 2019,” he said.

Source: DePutter Publishing Ltd.

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