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Canadian Dollar to Lose a Further 5 Percent, Will Soon Buy Only US$0.71 (TD Securities)

Prospects for the Canadian dollar have turned “considerably to the downside” and the currency is likely to lose 5 percent of its value this year, TD Securities has said.

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The Canadian dollar started the year brightly. Its gain of 4 percent against the US dollar in January was more than was achieved by any other G10 currency. Since then, though, the loonie has been in something of a dogfight: it has managed to hold its value against some of its peers but has lost out against most.

Those start-of-year gains were much needed following a grim fourth quarter in which the loonie slipped by 6 percent to a 19-month low of 73.18 US cents. Those losses were driven primarily by the oil price, which imploded during the period, and so too were January’s gains, which followed the oil market recovery.

CAD to USD - 1 Week chart to 16 Mar
CAD/USD - 1 Week chart to 16 Mar

That the market’s attention has now turned from energy to the domestic economy is bad news for the Canadian dollar’s outlook.

Two weeks ago, a shocking GDP report had some analysts putting Canada on “recession watch.” The report showed the economy growing at just 0.1 percent in the fourth quarter—the slowest pace of quarterly growth for 2 ½ years and a figure that takes annualized growth to just 0.4 percent.

“Prospects for the Canadian dollar have shifted considerably to the downside over the medium-term. This comes in the wake of a poor … GDP report and the Bank of Canada returning to the drawing board on what it got wrong,” says TD Securities’ senior FX analyst Mazen Issa.

Issa foresees the Canadian dollar weakening this year on the back of “real economic problems” to 71.4 US cents—a level 5 percent below Friday’s closing rate of 75 cents and one not seen since early 2016.

This week and last, Issa described the Canadian dollar as a “problem child” within G10 FX. Simply, “the positives are hard to find.”

The Bank of Canada can “no longer ignore domestic factors,” Issa argues, and is “effectively one step removed from throwing in the towel on the policy cycle.”

Like many others in the market, TD Securities is forecasting no change in Canadian interest rates this year, and given that one additional hike is expected by the US Federal Reserve, interest rate differentials will ensure that pressure remains on the loonie relative to its US counterpart.   

Issa isn’t the only expert betting against the currency. Earlier in March, CIBC Capital Markets’ chief economist Avery Shenfeld argued for an identical forecast: With net inflows into Canadian securities at a 10-year low, “there’s a clearer path for USD/CAD to reach something closer to its modelled fair value, which is around C$1.40 [CAD/USD $0.714],” he said.


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