Connect to share and comment
OTTAWA - The shine is about the come off the Canadian dollar.
TD Bank says in a new forecast the loonie, which has been hovering around parity with the United States, could hit as low as 90 cents US by the end of the year and early 2014.
The loonie has actually strengthened of late since falling as low as 96.68 cents US in March, but economists Francis Fong and Leslie Preston, who wrote the report, say that won't last.
"OK, fine it has strengthened, but that doesn't change the fundamental story," Fong explained. "If you look at the fundamental factors driving the Canadian dollar, we think the outlook is all down."
The analysts note Canada is now expected to underperform the United States in economic growth this year and commodity prices, which have been a major factor behind the loonie's flight, are expected to remain weak given slower-than-anticipated growth in China. Finally, the U.S. dollar is doing better and the Bank of Canada has signalled interest rates will remain low for longer.
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 professional sports teams that compete in North American leagues, who must pay their players in greenbacks.
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 economic 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 transition within the Canadian economy towards more business investment and export-led growth has not been smooth thus far," the economists say. "A depreciation in the loonie to a level more consistent with fair value estimates â€” pegged around 80-90 cents US â€” should help facilitate that transition."
Other analysts have also predicted a soft period for the Canadian loonie, but the TD economists' outlook is for among the biggest corrections.
Still, they say the loonie is unlikely to remain there for long. They say the Bank of Canada is likely 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.