Investors’ search for safety in the wake of deteriorating global economic conditions will send the Canadian dollar down further, perhaps to 95 cents (U.S.) by the end of the month, say Scotia Capital currency strategists Camilla Sutton and Eric Theoret.
The loonie fell 4.5 per cent against the U.S. dollar in May, but it held up pretty well against other currencies in that period. It rose 2 per cent against the euro, 1 per cent against the British pound and 5 per cent against the Mexican peso.
On Wednesday, the loonie was trading up 0.02 cents at 96.5 cents.
The loonie has been losing value against the greenback as investors around the globe move money into what they perceive to be the world’s safest currency. But the authors contend that the decline will be temporary. They point to several factors that will help the loonie in the medium term.
First, the Bank of Canada is likely to raise interest rates long before central banks in the U.S., Europe or Japan do. Second, even with growth slowing in China and India, Asian demand for commodities is still strong and will remain such, giving support to commodity markets. Third, the economic outlook for the U.S. continues to look positive, which should support Canada’s economy. Lastly, Canada’s triple-A bond rating should keep attracting investors seeking to diversity from Europe.
“Spikes in risk aversion are typically violent but temporary; however the retracement is renowned for being slow,” Ms. Sutton and Mr. Theoret wrote in their June foreign exchange outlook.
“The outlook has deteriorated, particularly in the near-term; however the traditional drivers of [the Canadian dollar] remain strong enough to generate a rally once risk aversion subsides.”
They expect that the loonie will strike parity with the U.S. dollar by the end of the year, trading at 1.01 cents, which is almost unchanged from the forecast they published in March.