Canadian dollar being buffeted by opposing forces

With commodity prices and interest rate differentials pulling the Canadian dollar in different directions again this year, our baseline scenario is that it will remain broadly unchanged, increasing only trivially from its current level to $0.77 by year-end. All currency forecasts come with a big disclaimer even in normal times, however, and 2017 will be anything but normal. That’s because it is still unclear exactly what policies the incoming Trump administration intends to adopt. Some of the proposed fiscal changes, such as the switch to a destination-based cash flow corporate tax that includes a border adjustment, could generate a marked appreciation in the US dollar. If Canada is dragged into a full-scale renegotiation of NAFTA, that could weigh on the Canadian dollar too. Finally, the incoming Trump administration includes a number of very hawkish national security nominees. If they push for undoing the Iran nuclear deal, there is a risk that the crude oil price could rise further than we have allowed for.