The Canadian dollar is expected to slide next year as the U.S. economy slows and foreign investors lose interest in the wake of a recent decision to tax income trusts, JP Morgan predicted Wednesday.
Strategists at the bank expect the loonie to weaken to 82 cents (U.S.) next year from the current level of 88.48 cents. JP Morgan had previously thought the loonie would finish next year at 85 cents.
One factor behind the downgrade was the recent decision to tax income trusts, a move that will cause foreign interest in Canada's stock market to fade.
“While we do not expect foreign investors to necessarily liquidate current income trust holdings, we believe these tax changes will at least marginally weigh on foreign interest in Canadian securities looking ahead,” said Rebecca Patterson, global currency strategist, in a note.
The Canadian dollar had surged earlier this year, topping 91 cents (U.S.) to its highest level since January, 1978, amid rising energy prices and the prospect of mergers and acquisitions in Canada.
JP Morgan doesn't expect mergers to give a helping hand to the currency next year, however.
“Slower growth, at least over the last several years, has gone hand in hand with relatively less M&A activity,” Ms. Patterson said. “Energy prices, and especially oil prices, (will) also moderate in 2007 and would also argue against another unexpectedly strong M&A-inflow year for Canada.”
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