After avoiding Canada during its currency's historic three-year collapse, Fidelity Investments is sensing the rout is nearing an end.
David Wolf, who manages $55-billion ($40-billion U.S.) for the world's second largest mutual-fund company, is starting to put on hedges protecting against Canadian-dollar strength on the overseas investments that he manages for local clients. He's also picking through the country's stock market in anticipation of better economic times ahead.
The Canadian dollar is bouncing back from a 13-year low reached last month in a climax to the longest, deepest depreciation in its history. With the free fall in oil prices that drove the currency's plunge looking less and less likely to reverse, the country is counting on a weaker dollar to transition away from its dependency on commodity exports to a more manufacturing-based economy.
"We're perhaps just at the outset of a time where we're going to need a relatively cheap Canadian dollar," Mr. Wolf, who was an adviser to former Bank of Canada Governor Mark Carney before joining Fidelity in 2014, said in an interview at Bloomberg's Toronto office. "So that's low, but not necessarily much lower."
The loonie, which closed Monday at 72.93 cents (U.S.), is forecast to weaken to 70.92 cents by the end of March before rallying to 73.53 cents by year end, according to the median estimate of more than 70 analysts surveyed by Bloomberg.
Canadian-dollar optimists point to recent manufacturing data as a sign the currency's 27-per-cent plunge in three years is making non-commodity exports more competitive abroad. Data on December manufacturing sales released last week showed the second straight monthly increase of more than 1 per cent, according to Statistics Canada.
"If you look at the export data excluding energy, volumes are starting to pick up," said Adam Cole, head of global foreign-exchange strategy at Royal Bank of Canada in London. "It's tentative still, but the trend is improving."
The Bank of Canada cited signs the weaker currency was helping the economy transition as a reason to refrain from cutting interest rates at its policy meeting Jan. 20. Since then, the loonie has gained 5.4 per cent against the U.S. dollar, the best performance among developed world currencies.
Hedge funds and other large speculators meanwhile are paring their bets on further losses, cutting net-short positions by 22,000 contracts in the three weeks ending Feb. 16 to 45,000 contracts, according to data from the Washington-based Commodity Futures Trading Commission.
The currency has been helped by a rebound in oil prices and anticipation of an economic boost from government stimulus spending promised in the upcoming federal budget due in March. While much of Canada's recovery depends on a weak currency facilitating the transition to a more manufacturing-based economy, the recent rally, and any other, may wind up sewing the seeds of its own demise.
Macquarie Group Ltd., Bloomberg's top-ranked forecaster for the Canadian dollar last year, is also the most bearish. Analyst David Doyle Feb. 19 reiterated his call for the currency to fall to 59.17 cents against the greenback, citing Canada's total debt burden, including provincial and consumer, reaching a record, making it's position even more precarious.
"It's a long transition to make," said Luc de La Durantaye, who manages $24-billion (Canadian) in foreign-exchange assets for CIBC Asset Management in Montreal. "That's why we don't see a lot of upside in the Canadian dollar versus the U.S. If it goes too strong on the upside, then you're sort of negating some of those gains."
Even after the recent gains in manufacturing, sales volumes are still below their levels for the same period in 2014, according to Bank of Montreal data. They've also yet to reclaim the levels reached before 2009's global recession as the years of currency strength in between caused manufacturers to shut capacity in Canada and move them to Mexico and other lower cost jurisdictions instead.
Fidelity's Mr. Wolf said it may be a long time before that capacity starts to be rebuilt. Even if the currency is done falling, Canadians should be prepared for it to stay weak for an extended period, even if some of the nation's equities and other financial markets start to rally in advance.
"We're closer to the end than the beginning of the depreciation," Mr. Wolf said.