LOONIE TO BENEFIT FROM INFLOWS, LESS DOVISH BA NK OF CANADA

The loonie may have finally found a floor as some of the forces that drove it below US90¢ this year are reversing, say National Bank Financial economists.

The loonie slipped below the US90¢ level in January, marking its lowest point in more than six years. It has spent the past month fluctuating around that level.

“We expect some of those forces that hurt the Canadian dollar last year to subside and even reverse in some cases,” said Stéfane Marion and Krishen Rangasamy, economists at National Bank Financial, in a note.

The economists point to portfolio inflows as one of the main factors that will help the loonie this year. They expect the inconsistent flows of last year could give way to more steady inflows this year as investors again focus on Canada’s sound government finances and highly rated securities.

Foreign direct investment is another area of support. It amounted to $64.2-billion last year, the best showing since 2008. Meanwhile, outflows came in at just under $44-billion, a three-year low.

“Those allowed net FDI inflows to turn positive for the first time since 2007,” the economists said. “In other words, for the first time in six years, FDI turned into a major contributor in financing the current account deficit. That’s a significant development.”

Finally, a less dovish Bank of Canada might be the loonie’s biggest benefactor. Some economists last year speculated about whether the bank might move to cut interest rates, a possibility that contributed to the loonie’s roughly 6% decline in 2013.

“In our view, the Bank of Canada’s optimism for 2014, which it restated in its March statement, is warranted,” the economists said. “Momentum from the second half of last year should carry over to this year as re-leveraging in the U.S., coupled with the fact that the Canadian dollar is now at its most competitive in years, allows the recovery of our exports to continue.”