What goes up...

Stocks pay the price as loonie weakens against U.S. dollar.

The Canadian dollar is expected to weaken against its U.S. counterpart in the coming months and could play a greater role in determining stock valuations than it has while hovering near parity for the past three years.

“The currency will be a more important metric to consider in company earnings analysis,” said Stephane Marion, chief economist and strategist at National Bank Financial.

The Canadian dollar since early January has fallen roughly 6.5% against the greenback, closing Tuesday at US95.16¢. Mr. Marion said the bank’s forecast calls for the loonie to trade in a wider range centred around US95¢ in the coming year.

Mr. Marion said the loonie continues to hold up against most world currencies, but has fallen victim to the U.S. dollar, which is emerging from a decade-long bear market.

“Helping the dollar out is the fact that other major world central banks are in easing mode,” he said. “And all of that easing is happening at a time when the Fed is signalling that it is on the brink of removing some monetary stimulus.”

Structural factors are also at play, he added, including a U.S. energy boom that has resulted in a significant drop in imports and a concerted effort by Washington to reduce the country’s debt and deficit.

But there are other issues hindering the loonie, said Pierre Lapointe, head of global strategy at Pavilion Global Markets in Montreal.

He said the Canadian dollar tends to be viewed as a play on the U.S. economy because of the two countries’ close ties and the U.S. Federal Reserve’s influence on the Bank of Canada’s behaviour.

But two factors may be breaking this relationship down, he said: The decoupling of the two countries’ housing markets and the growing lack of competitiveness in Canada, which now runs one of the largest current account deficits in the G10.

“We think the common perception of Canada and the Canadian dollar as a play on the U.S. economy is no longer valid,” he said in a recent note to clients.

“As markets begin to realize the decoupling that is currently taking place, we believe there is an increasing likelihood the Canadian dollar will move lower in spite of better U.S. trends.”

National Bank analysts said several stocks across varying sectors would be impacted by a rising U.S. dollar.