Loonie’s 2023 outlook is uncertain
Experts disagree on how commodity prices, U.S. dollar and interest rates will affect Canada
The outlook for the loonie in 2023 largely depends on commodity prices, how the U.S. dollar fares, and whether central banks are successful in avoiding a major recession, experts said.
The Canadian dollar recently rose to its highest level in more than two months against the U.S. dollar, which gained strength Friday after a stronger-than-expected jobs report. However, analysts are predicting some further weakness in the U.S. dollar in 2023. CIBC, in a Jan. 23 report, said the currency will probably weaken in 2023, which may result in Canadian dollar strength in later quarters.
Analysts at several major Canadian banks predict the loonie will be worth almost 77 cents U.S. by the end of 2023, while it’s currently closer to 75 cents U.S.
But not everyone agrees. Kevin Burkett, portfolio manager at Victoria-based Burkett Asset Management, doesn’t think the U.S. dollar will flag, while he sees commodities weakening in 2023.
In 2022, the loonie’s key drivers — interest rates and commodities — were highly volatile, Burkett said. But the dollar didn’t swing because its main counterpart, the U.S. dollar, was seeing similar moves, especially when it came to the direction and pace of interest rates.
But if economic conditions and policy decisions between the two countries begin to diverge in 2023, that could affect the exchange rate, Burkett said.
“I see Canada in a weaker position to start the year than the U.S., both because of the commodities outlook and because I think the impact of higher interest rates is much more significant in Canada than it is in the U.S.,” Burkett said.
Michael Greenberg, senior vicepresident and portfolio manager at Franklin Templeton Investment Solutions, said the consumer in Canada is a little weaker relative to the U.S. consumer due to debt levels and the housing market, making us more sensitive to interest rates.
Greenberg said if an economic downturn provoked by central banks’ policies is harsher than expected, it would weaken the loonie.
Several analysts predict the loonie will be worth almost 77 cents U.S. by the end of 2023, up from the 75 cents it sits at now