Brighter days are ahead for the Canadian dollar, which has been under pressure recently amid continued weakness in the global economy, says CIBC World Markets.
A new report from the bank says the loonie should stay within a couple of cents of current levels for the rest of the year, then rebound to parity with the U.S. greenback by the end of 2014.
“As we expected, the Canadian dollar has been a casualty of disappointing global growth this year, moving even earlier than we forecast to our target of five cents weaker than parity,” says CIBC chief economist Avery Shenfeld, who co-authored the report.
“While normal volatility will no doubt see days with the Canadian dollar a cent or two weaker than today’s levels, we view the bout of Canadian dollar softness this year as an opportunity to buy it ahead of a likely appreciation in 2014.”
Other forecasters have predicted the value of the loonie will continue to decrease and fall like the Australian dollar which moved from $1.06 (U.S.) in mid-January to 0.91 cents today.
TD Bank predicted in May that the Canadian dollar could hit as low as 90 cents U.S. by the end of the year and early 2014.
It said the currency will be hurt by Canada’s weaker economic performance than the United States and lower commodity prices which are expected to remain weak because of slower-than-anticipated growth in China.
Shenfeld expects the Canadian dollar’s appreciation next year will be driven by a more favourable external environment, particularly growing strength in the U.S. economy.
CIBC has forecast that growth in the U.S. will increase to 3.3 per cent next year from 1.8 per cent in 2013, largely on further improvement in homebuilding and a “lower drag from fiscal policy.”
“The Canadian dollar should be a beneficiary of better U.S. and global growth next year,” Shenfeld said, adding that he doesn’t expect the Federal Reserve will completely stop its policy of buying Treasury bonds, known as quantitative easing, until the U.S. economy is strong enough.
The bank expects crude oil will average $98 per barrel next year, helped by improving global growth, even if Mideast politics settle down a bit.
Some currency traders view the Australian and Canadian dollars as twins, but Shenfeld said the slide of the Australian dollar doesn’t foretell the loonie’s fate.
“Analogies to the Australian dollar’s steeper setback are overdone, as the currencies are more like distant cousins than twins in terms of the economic fundamentals,” he wrote.
CIBC said Canada’s exports are much more varied than Australia, whose top six exports are all commodities and resources which account for around three-quarters of all outbound shipments. Canada’s resources make up less than half of exports and manufactured products like automobiles and parts still have a major role.
Australia is also more dependent on exports of iron ore to China, where economic growth has been disappointing.
The lower dollar is bad news for Canadian snowbirds planning to vacation in the sunny south next winter, or anyone hoping to buy property in the United States. It is also a handicap for the professional sports franchises in Canada that must pay their players in U.S. dollars.
But overall, economists believe a weaker currency is a net benefit for the economy especially given that about 75 per cent of Canadian exports are sold in the U.S. market. As well, a low-flying loonie will help lure American tourists and help Canadian retailers hurt by cross-border shoppers.
The Bank of Canada is counting on growth in exports to sustain growth given that consumers are tapped out and heavily in debt. A lower dollar would be a boost to exporters by making Canadian products more competitive south of the border.
The central bank is expected to start raising interest rates before its counterpart in the United States, which should help the Canadian currency stabilize and rebound somewhat closer to parity.