Analysts see loonie faltering further

TORONTO • The Canadian dollar will weaken in the coming months, as the Federal Reserve is expected to continue increasing rates while the Bank of Canada is bound to stay put, according to the currency’s highestranked forecasters.

The loonie started strong in 2017, recovering from a 10- month low at the end of 2016 by taking advantage of January’ s broad-based decline in the U.S. dollar. But it has faltered in recent weeks, reducing this year’s gain to 0.2 per cent, making it the worst performer among Group of 10 currencies.

While Canada’s economy has shown signs of improvement lately, posting higherthan-expected growth, retail sales and jobs numbers, that hasn’t been enough to convince Bank of Canada Governor Stephen Poloz of the need to raise interest rates. The Fed, on the other hand, has hiked twice in the last four months and is on track for additional increases as the U.S. economy picks up. That will put pressure on the Canadian dollar, according to Scott Petruska, a senior adviser at SVB Financial Group of Santa Clara, California.

“I’m in the camp that thinks the U.S. dollar is going to be strong,” said Petruska, who topped a Bloomberg ranking of Canadian dollar forecasters in the first quarter and expects the loonie to slip almost a penny to $1.35 over the next six months.

“Canadian volatility is very low, and when volatility is low that’s where the interest rates differentials become the dominant theme.”

The loonie rose 0.4 per cent to $1.3364 per U.S. dollar in morning trading in Toronto, curbing this week’s loss to 0.3 percent. Thirtyday implied volatility in the currency fell to the lowest since October 2014 this month, according to data compiled by Bloomberg.

The Canadian economy has more room to grow than its American counterpart, Poloz said in an interview with Maclean’s magazine last week, pushing back against the idea that he would soon follow his peers in lifting interest rates. Traders still see a 31 per cent chance the Bank of Canada will hike this year, according to overnight index swaps. The next rate decision is on April 12.