Loonie and Swissie Seen as Surprise Winner and Loser in 2016

The Canadian Dollar may be the comeback kid of 2016, whilst the Swiss Franc is expected to see its strength wane, according to analysts at SocGen.

In a new year’s eve note reviewing the past year and looking ahead to the next, SocGen’s Kit Juckes said he saw the battered loonie regenerating, after having “drowned” in 2015, but that:

“After that kind of under-performance, it's no wonder the Canadian dollar looms so appealing to me for next year.

It'll need oil prices to stabilise but in due course, it's going to make some kind of recovery.”

The analyst saw the currency eventually coming out on top:

“I reckon it will be joined in the top half of the 2016 G10FX chase by the US dollar (again), the Swedish krona, the Japanese yen and the Norwegian krone.”

Meanwhile, Juckes saw the Swiss Franc as being one of the foremost losers next year:

“The bottom half of the table should see Sterling, Australian and New Zealand dollars, the Euro and the Swiss franc all weaken, the last of these being the most vulnerable of all.”

Forecast echo’s HSBCs

The forecast is in line with that of David Bloom at HSBC who earlier in the month published a highly controversial forecast that the Canadian Dollar would rise to 1.25 versus the U.S in the year ahead, mainly as a result of the new government’s expansionist fiscal policies.

Since then, however, the currency has weakened even further, falling from the 1.35s to a peak of 1.4006, almost entirely due to a further weakening in oil, reminding investors just how strong a fundamental driver the commodity is for the pair.

Given there is no clear bottom in place for oil, and the fundamental outlook remains unchanged, its difficult to see a rebound in the commodity producing the much needed traction to begin a reversal in the fortunes of CAD, however, not all analysts are bearish about oil.

Reasons to be bullish about oil

UBS’s Dominic Schnider is an oil-bull over the long-term - the head of commodity and Asia-Pacific Forex, said recently in an interview with CNBC, that:

"The oil market is over supplied, doesn't look great in the short run, but there is still a recovery story for the second half."

Other pro-oil voices, include, Bill Smith, chief investment officer and senior portfolio manager of Battery Park Capital in New York, who argues there is a massive:

"disconnect between reality and what the future of oil prices will be.”

Smith goes on to say: “there’s a lot of capacity coming off,” citing a 60% fall in the U.S Rig Count, as well as “multiple wars raging in the Middle East,” as another factor reducing supply in the future.

Whatever else, it seems clear that in order for there to be a recovery in the loonie, there needs to be recovery in oil.

Economic Factors

Alastair Sweetmen of Halo Financial, is more bearish the Canadian dollar, arguing that a combination of falling oil prices and the BOC’s loose monetary policies were to blame for CAD’s performance:

“the Canadian dollar takes the biscuit as one of the worst performers of 2015. It’s down 17% against the USD this year, down 14% against the pound – the majority of the weakness attributable to the collapse in oil prices.

Two interest rate cuts from the Bank of Canada have also added to the downside pressure on the Canadian dollar and with the increase in interest rates from the US Fed this week.”

He goes on to list the economic problems the country also faces:

“Canadian Q3 GDP missed expectations at the start of December, the headline 2.3% quarterly growth, below 2.4% headline but it was the September monthly reading of -0.5% , well below 0.1% previous which weighed on the dollar.”

Jobs also undershot:

“Jobs data also missed the mark, the unemployment rate grew to 7.1% and the net change in employment for November was a significant miss, -35.7k jobs.”

The latest reading of Canadian inflation showed a 1.4% rise, up from 1.0% in the previous month, and a record high for the year, but lower than the 1.5% forecast.

Analysts dismissed the figures, however, arguing the change was mainly due to a lessening impact of the negative energy subcomponent of CPI, which had been less in November since Oil price declines were only -6.4% compared to the -13.0% of previous months – rather than a real rise in prices across the broader economy.

This clearly puts the BOC back in the picture as potentially adding to loonie weakness by introducing more accommodation.

Risk of sub-zero rates

In a recent speech BOC Governor Stephen Poloz said he would be willing to lower rates to below zero, from their current 0.5% level, adding that he saw about 100 basis points of wiggle room below the current rate, which would indicate a lower boundary of -0.5%. It was the first time a sub-zero rate had been mentioned by the BOC, in a clearly dovish sign.

However, the governor added the proviso that such a move would only be take in extremis, if there was, for example, a global financial crisis on a scale similar to that in 2007-8.

Ultra-weak CAD to support 

The Canadian Conference Board, also sees a the economy recovering in 2016, although this will be mainly as a result the ultra-weak CAD which will as a stimulant to export trade, since it will make Canadian exports competitive vis-à-vis comparable products from other countries:

“The trade sector will drive much of the improvement, underpinned by strong growth in the U.S. economy and a lower Canadian dollar,” according to the Conference Board’s latest report.