December 27, 2018
As we stand on the edge of 2019 we wanted to end the year by looking at the currencies of the U.S. and Canada — "home currencies" in our minds.
The Canadian dollar continues to be driven primarily by oil prices and that country's relationship with the U.S. We think oil supply cuts will support energy prices and thus the Canadian dollar. Relative interest rate differentials and the health of the U.S. economy also play a role.
Any slowdown in the U.S. would obviously weaken the Canadian loonie. The real question is whether it would weaken more than the U.S. dollar. Overall we see the Canadian dollar more or less range-bound for most of 2019.
The U.S. dollar seems to have peaked in 2018. A couple of forces are lining up to push the dollar to the downside in 2019. One is an emerging sense that the U.S. Federal Reserve is nearing the end of its rate-hike cycle, which takes away one of the dollar's main supports. The reasoning behind that thinking — that the current expansion is long in the tooth and fiscal stimulus will decrease next year —is another reason to pull back on U.S. dollar purchases.
On the technical side, it's hard to ignore cycles and trends that have broad and powerful implications. The U.S. dollar tends to run in cycles of about seven years. If that holds true, 2019 could be the start of a prolonged downtrend in the dollar.
Our View: Taking last week's thoughts into account, we see the USD on a downtrend, losing value in relation to most other major currencies. Our read of markets would have this developing mostly after the first few months of 2019. In any event, it looks to be an interesting year.
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