The Canadian dollar is in for a rough ride for the rest of the year.
According to Scotiabank’s foreign exchange outlook, the value of the loonie versus other major currencies is expected to remain volatile as many of the circumstances that have led to its lofty heights unravel.
Among the biggest impacts facing the loonie’s relative value is the strength of the U.S. economy. The U.S. greenback is expected to strengthen given relatively muted economic growth in Canada, stagnant employment growth relative to the U.S. and a moderating housing market. The loonie is also likely to see more volatility in the coming weeks and months in the lead-up to the US Federal Reserve acting on its previously announced plan to slow its bond purchasing program that was meant to depress longer term U.S. interest rates.
But falling foreign interest in Canadian bonds will also stall the loonie’s upward potential. Scotiabank noted that the six-month moving average of monthly international purchases of bonds has fallen to US$2.6 billion, down from an average $8 billion over the last four years.
Western Union’s September foreign exchange report also noted that the correlation between the loonie and world oil prices has also decoupled. While rising concerns over military action in the Middle East has affected oil prices, the loonie has not seen a corresponding rise, because the moves have been affected by rising geopolitical risks than any expected increase in oil demand.
With inflation and economic growth flat-lining, Western Union also doesn’t expect Canadian interest rates to rise in the near future.
But the Japanese yen will be among the currencies against which the loonie could appreciate. Scotiabank expects the loonie to break the 100-yen mark sometime in 2014’s second quarter and continue to appreciate for the rest of the year.
For exporters to Canada’s closest neighbour, Scotiabank projected stabilization of the loonie versus the greenback next year as the benefits of a strengthening U.S. economy manifest themselves north of the 49th parallel, bolstered by U.S. demand for Canada’s forestry, energy and auto products. •
