The loonie has a tumultuous year ahead, and could slump as low as 65 cents U.S. if things get really bad, according to one of Canada’s leading economists.
“We see in our base-case forecast it moving down a couple cents to 72 or 73 cents, but there’s a risk of a much steeper slide if trade barriers emerge,” said Avery Shenfeld, chief economist at CIBC.
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The loonie has been on a rollercoaster as of late due to the election of protectionist-touting Donald Trump and an OPEC agreement to cut oil production. These factors, along with U.S. Federal Reserve interest rate hikes, will continue to guide the loonie’s worth in 2017.
“We could see a modest weakening in the exchange if oil doesn’t make any further gains and the US hikes interest rates while Canada stands pat. But there’s a risk of a more serious slide if some of the protectionist measures that the Trump administration is mulling over actually come into effect,” said Shenfeld.
“We could easily see the Canadian dollar somewhere in the 65-cent range.”
That’s not in CIBC’s official forecast, Shenfeld said, who added the hope is that, “cooler heads prevail in Washington.”
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Some predictions have seen the loonie go even lower. Last March, Macquarie Securities North America economist David Doyle predicted the loonie would fall to 59 cents U.S. in the coming years.
The loonie is so closely tied to the greenback that even comments by Trump in a news report or a tweet can send Canada’s currency up or down. The loonie rallied Tuesday following a Wall Street Journal report that stated President-elect Donald Trump thinks the U.S. dollar is “too strong,” leaving the country unable to compete against China.
“Our companies can’t compete with them now because our currency is too strong. And it’s killing us,” Trump said, according to the Journal.
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Commentary Tuesday by Scotiabank’s foreign exchange team said it wasn’t clear whether Trump was saying the U.S. dollar was too high specifically against China’s yuan or currencies in general, but investors reacted anyway.
Trump’s approach leaves Canada’s economy vulnerable to statements made seemingly on whims.
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“It’s a combination of actual trade measures as well as trade policy by Twitter, where you’re simply threatening the companies that choose to move outside the US,” said Shenfeld. “All those could pose barriers to Canada growing its export base and result in a weaker exchange rate.”
A lower loonie can be good for exporters, said Farm Credit Canada chief agricultural economist J.P. Gervais, who projects the dollar to hover around 75 cents U.S. through the year.
Canada can be more competitive in foreign markets, he said, undercutting other exporting countries. But there’s a “flip side,” Gervais said, as the cost of doing business tends to go up.
“As the loonie goes down, that makes fertilizer prices, fuel prices more expensive.”
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Shenfeld cautioned against celebrating a lower loonie.
“We would prefer to live in a country that could have a strong economy and a strong exchange rate. It’s not a desirable outcome if the only way to remain competitive is to cheapen the dollar because as Canadians, of course, that makes imported goods and travel abroad more expensive, and lowers our standard of living.”
Canadians might want to consider investing in the greenback, whether it’s for travel later this year, or for retirement plans down the road.
“It pays to have a little bit of their money locked away as an insurance move against a weaker Canadian dollar,” said Shenfeld.
With files from the Canadian Press
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