Loonie rally is about to end, say economists
The loonie has rallied against the U.S. dollar over the past year, but it now appears to be losing steam.
The Canadian dollar has been among the best performing currencies against the U.S. currency, surging nearly 10 per cent in a 12-month period, and is up 1.6 per cent year-to-date, buoyed by higher commodity prices. The currency also recently briefly breached the psychologically important Us80-cent barrier (or $1.25).
But a number of Canadian bank economists believe the loonie's run is about to end, especially as oil prices start to plateau. Oil-exporting countries led by Saudi Arabia are expected to pump more oil over the summer that would likely lead to a pullback in oil prices.
“Combined with a USD that is now broadly back in favour with investors, CAD no longer looks set to appreciate, and will likely remain steady into mid-year,” Canadian Imperial Bank of Commerce economists Katherine Judge and Avery Shenfeld wrote in a note on Friday.
Bank of Montreal's chief economist Doug Porter is also surprised by the resiliency of the Canadian dollar, given the slow vaccine rollout in Canada compared to the U.S.
While Porter thinks consumer resiliency and a robust industrial economy is keeping the loonie afloat, he believes the U.S. economy is set to strengthen. “But that speaks more to upside risks for the U.S. growth outlook, and less to downside for Canada,” Porter said.
The loonie is also expected to sag as Canada is in the midst of yet another lockdown in key provinces, while the U.S. is charging ahead with rapid vaccinations and looking to inject trillions of dollars into its economy. With conditions improving fast stateside and inflation fears rising, the U.S. Federal Reserve may also take a hawkish tone sooner than anticipated that would bolster the U.S. dollar.
In addition, Canada's current account deficit is also expected to widen once cross-border travel resumes. “Some other commodity prices have been elevated by supply disruptions and could moderate even with improving global demand ahead. Look for USDCAD to trade in the 1.30-1.34 (74 U.S. cents) range next year,” the CIBC economists said. “That level will be more constructive for exports ...,” Judge and Shenfeld added.
Other Canadian economists echoed that sentiment. François Dupuis, vice-president and chief economist at Desjardins Group, said the Canadian dollar's appreciation potential seems more limited for the next few quarters. “The movement forecast for Canadian interest rates and commodity prices does not suggest the loonie will be able to go much above US$0.81,” Dupuis said in a note last month.