GAINS IN THE LONG TERM

Healthier global economy will help

The near-term outlook for the Canadian dollar may be mixed, but the long-term prospects look much more promising, as many of the same factors — namely commodity prices, global growth and inflation —that drove it to parity versus the U.S. in the past will surface once again.

Long known as a petro-dollar, given its historical relationship with oil prices, the loonie will grab more investor attention as activity rises in the resource sector. The global economy is growing, so commodity consumption will rise and Canada will benefit from the additional flow of funds to resources. Rahim Madhavji, president at Knightsbridge Foreign Exchange Inc., notes this is evident in the large acquisitions of Canadian companies by their U.S. peers.

It will surely take some time for world economies to get on more solid footing, as Europe’s banking sector continues to face challenges and U.S. consumers still need to strengthen their financial positions. China continues to grow, albeit at a slower pace, but the shift toward a consumer-driven economy clearly won’t happen overnight. The transition away from heavy infrastructure spending produces adjustments in commodity demand, but it doesn’t come close to eliminating it. As a result, Madhavji thinks 2016 is a good estimate for when the global economy will be running at full stream. And when the U.S. and Europe are finally healthy again and there’s more consistent growth in emerging markets, the Canadian dollar will be in an ideal position to leverage global growth.

As for the Bank of Canada, its talking down of the Canadian dollar for much of the recent past has to eventually change. “When the Canadian economy is booming again with the resource economy at the helm, the Bank of Canada will be in no position to talk down the loonie but to simply adjust interest rates to manage inflation,” Madhavji says. “The fundamental reasons that have driven the Canadian dollar to parity in the past will rise again.”

And if any or all of these elements surface sooner than expected, the loonie may be the currency of the bulls sooner than many think. —