WHAT THE EXPERTS SAY ABOUT THE FUTURE OF THE LOONIE
Currency analysts expect the Canadian dollar to continue its decline as the U.S. ponders interest-rate hikes and oil weighs on Canada’s economy
Low interest rates and low oil prices could see the Canadian dollar fall further in 2016, currency strategists say.
Canada’s commodity-sensitive currency has lost 14 per cent against a strengthening U.S. dollar since the start of the year as the price of oil plunged by 28 per cent during the same period.
With the U.S. Federal Reserve widely expected to start raising its trendsetting interest rate next week while the Bank of Canada stands pat, the gap between the Canadian and U.S. currencies could widen even further.
Closing at 73.60 cents (U.S.) Tuesday, down 0.40 cents on the day, the loonie has already slumped below analysts’ median year-end forecast of 74.62 cents, according to a Bloomberg survey.
How much lower could the Canadian dollar fall? The Star asked some currency watchers for their best guess:
Avery Shenfeld, chief economist, CIBC World Markets.
The loonie ranks among the worst-performing major currencies against the greenback and the headwinds have yet to abate, CIBC economists wrote in a report Tuesday.
“I think a 70-cent Canadian dollar is now in sight,” Shenfeld said in an interview. “It’s the combination of weak prices for some of our key exports, including oil, and the prospect the U.S. will be raising interest rates while Canada won’t be any time in the next year and a half.”
The latest fall in oil prices coupled with a weak nearterm economic outlook underscores CIBC’s belief that near-term risks to the loonie remain skewed toward additional depreciation, the report said.
With crude now below $40 a barrel, the price of Canada’s most important export will struggle next year to reach 2015’s modest bar. Meanwhile, many of the benefits from a weaker exchange rate have yet to show up.
The bank expects the dollar will hit the 70-cent level as early as March, before recovering toward the end of 2016 to 75.75 cents .
“Right now all of the arrows are pointing the wrong way for the Canadian dollar,” Shenfeld said.
Colin Cieszynski, chief market strategist, CMC Markets (Canada)
The Canadian dollar could fall to 71.50 cents over the next three months and even further to 70.75 cents within six months. It all depends on the price of oil, he said. If oil prices turn around, the Canadian dollar could also turn around. On the other hand, if crude oil continues to fall, the loonie could fall even lower.
If the North American benchmark price of crude oil went to $25 a barrel, for example, the Canadian dollar could fall to 70 cents, he said.
That’s not too likely, in his view. Cieszynski said he believes oil has stabilized at its current $35 a barrel level.
Canadian and U.S. interest-rate policies are not a factor in the loonie’s slide this week. He believes the likelihood of a U.S. rate hike in mid December is already priced into the market.
“If the Fed raises rates next week, I don’t think that’s going to knock the Canadian dollar down,” he said.
Shaun Osborne, chief FX strategist, Scotiabank
The risk to the Canadian dollar was elevated heading into Bank of Canada governor Stephen Poloz’s speech on the subject of “unconventional monetary policy,” Osborne noted in a report to clients Tuesday.
Poloz speculated on the use of “negative” interest rates, a measure some European central banks have used to control economic growth, though he said it would be a last-resort measure adopted during periods of extreme crisis.
Scotiabank said it expects no significant pickup in commodity prices at least until late 2016. Low crude oil prices will provide additional headwinds for the Canadian dollar if domestic growth prospects fail to improve in line with the Bank of Canada’s expectations, the bank said.
That could trigger market speculation that Canada’s central bank may cut interest rates further.
As well, the Canadian dollar is weak by comparison with a U.S. dollar that has strengthened against most other currencies and will likely continue to do so through December and early January.
Scotiabank is forecasting a 2015 yearend Canada-U.S. exchange rate of $1.37, or 72.99 cents (U.S.), and a 2016 year-end exchange rate of $1.37, or 71.94 cents (U.S.).
George Davis, chief fixed income and currencies technical analyst, RBC Capital Markets
“We think the Canadian dollar is going to continue to weaken through the first half of 2016,” Davis said.
He cites two factors: rising interest rates south of the border and continuing weakness in global commodity prices, especially oil.
RBC expects the U.S. Federal Reserve will begin raising its benchmark interest rate next week and continue with additional hikes through 2016. Meanwhile, the Bank of Canada is expected to remain on hold until the end of next year as the economy grapples with low oil prices.
Canada’s oil and gas sector is expected to cut capital spending a further 15 per cent in 2016, Davis said.
The economy is expected to begin rebounding in the second half of the year, as oil prices stabilize, markets adjust to U.S. rate cuts and the benefits of a lower dollar flow through to Canadian exporters.
RBC is forecasting the Canadian dollar will fall to 72.5 cents by mid-2016 but recover to around 75 cents by year-end.