Loonie poised for breakout in 2020
Economist forecasts the currency may end up at 79 cents to the greenback
The loonie may finally be poised to break out of a the trading range that’s held it in place for the better part of 20 months, setting up a rally in 2021 that could see it hit 82 cents to the U.S. dollar.
That’s the view of Capital Economics’ economist Stephen Brown, who is projecting the loonie will wrap 2020 at 79 cents to the greenback.
The last time the Canadian currency traded at 79 cents was in April 2018, when it could not hold the level for more than a week. Since then, the loonie has been confined to a range between 73 cents and 78 cents.
Trading within that range was still enough to make the loonie the best-performing major currency against the greenback in 2019. The loonie held firm, Brown said, in comparison to other currencies because the Bank of Canada did not follow the monetary policy trends laid out by the world’s other major central banks and cut interest rates.
Brown sees the Bank of Canada standing pat again in 2020, even in the face of a currency rally that may begin to shift its approach from neutral to dovish. Policy-makers may be tempted to squash the rally with a rate cut, Brown admits, but he doesn’t foresee that action taking place because it might set the central bank back elsewhere.
“The Bank of Canada is so concerned about potentially adding to the household debt burden by lowering interest rates and making debt cheaper that I don’t think (a loonie rally) by itself is enough to get the bank to cut interest rates,” he said.
Brown’s thesis is supported by his belief that the energy sector will rebound in 2020 and that the economy will be boosted by a 10to 15-per-cent increase in oil exports. Others have suggested that the loonie could also be boosted as a result of a weakening U.S. dollar, but this view is far from being the consensus.
Sunlife Global Investments chief investment officer Sadiq Adatia sees the loonie having a meagre year. “It’s going to be more rangebound than anything else,” said
Adatia. The reason for this is because unlike Brown, he doesn’t estimate that there will be much movement in the energy sector and is leaving the door open for a Bank of Canada rate cut. And while the U.S. markets may see some capital move out of them as investors begin to search for value over growth, Canada may face similar challenges, he said, because its economy is slowing down.
Concerns about Canada’s economy are also weighing on Dagmara Fijalkowski, RBC Global Asset Management head of global fixed income and currencies, and portfolio manager Daniel Mitchell, who co-authored an investment outlook for 2020 where they predicted that the loonie would fall to 72.99 cents in 2020.
Canada has become a less attractive place to do business, Fijalkowski and Mitchell said, because of taxes and stricter regulations while trade continues to languish. That’s occurring as the gap between the pace of hiring and GDP growth create a “productivity problem.”
“Ultimately, we think the longer-term negatives will cause the loonie to marginally underperform (this) year, even in an environment where the U.S. dollar declines overall,” they wrote.