Loonie likely to weaken in short term

TORONTO — The Canadian dollar is likely to slip in coming months as a collapse in global trade and the prospect of a more prolonged slowdown from the coronavirus pandemic put pressure on the currency, a Reuters poll of analysts showed.

The loonie has rebounded nearly 9 per cent since reaching a four-year low in March as investors became optimistic that once lockdowns on households and businesses were eased, a strong recovery in global economic activity would be particularly beneficial for Canada’s exportdependent economy.

But some analysts polled by Reuters in the June 1 to 3 monthly foreign exchange poll say that bout of optimism may have run its course for now.

“Maybe a lot of the good news is already in the CAD price,” said Mazen Issa, a senior FX strategist at TD Securities. “Expectations for a V-shaped (recovery), I think, are going to be sorely misplaced and in that kind of environment CAD might struggle.”

In a V-shaped recovery, activity climbs sharply back to its previous peak.

While forecasts for the Canadian dollar were raised from the May poll, the currency was expected to weaken 2.9 per cent to 1.39 in one month from about 1.35 on Wednesday. It was then expected to climb back to 1.37 in six months and 1.35 in one year.

The Bank of Canada, this week, said the outlook for the second half of the year and beyond is “heavily clouded.” It estimates second-quarter gross domestic product will fall 10 to 20 per cent further after dropping 2.1 per cent in the first quarter compared with the final quarter of 2019.

“We believe there’s still a lot of ground to cover before economic activity returns to pre-pandemic levels,” said Hendrix Vachon, a senior economist at Desjardins. “Cautious optimism seems appropriate.”