The Canadian dollar will hit US98¢ at the end of this year, the result of multiple economic headwinds and tailwinds. That’s according to the April edition of Scotiabank’s Foreign Exchange Outlook, released this week.
“We have all these different offsetting factors that are driving the Canadian dollar,” said Camilla Sutton in an interview with me yesterday. Sutton is chief foreign exchange strategist at Scotiabank and a coauthor of the report. The bank forecasts our dollar will reach parity with the greenback in the second quarter of 2014 and will remain there through the end of the year.
“I’m afraid it looks a little boring,” joked Sutton. The truth is that what’s driving the loonie — up, down and sideways — is a useful reminder of just how vulnerable Canadians are to global economic trends. Four things to watch:
- Canadian gross domestic product growth is slowing. “We have an improving growth outlook in the U.S., whereas in Canada we’ve had fairly disappointing growth in Q1,” said Sutton. “That divergence has weighed on the Canadian dollar.” Real gross domestic product growth in January came in at just 0.2%. Canada’s weakness is due partly to a softening housing market, which Sutton told me will moderate but not collapse.
- The U.S. economy is rebounding. On one hand, a strong U.S. economy drives the greenback higher against our loonie. But because the U.S. is our principal trading partner, our economy also benefits from a U.S. turnaround. “Net net it’s positive,” said Sutton.
- Chinese demand for our commodities is holding firm. “China is expected to grow at over 8%,” Sutton told me. “The setting of commodity prices is very much influenced by China.” Our dollar tends to move in tandem with commodity prices.
- Global investors continue to seek out AAA-rated currencies. There are just 11 countries left with full AAA-ratings, and Canada is on that list. This will continue to attract currency investors for the foreseeable future.
“What’s most important is relative central bank policy,” Sutton told me. “The Bank of Canada is on hold, so it’s more likely we’ll be watching for shifts in Fed policy.”
Scotiabank is forecasting that the Bank of Canada will put off an increase to its overnight rate until 2015. Meanwhile, the U.S. Federal Reserve is expected to begin winding down its quantitative easing program, which along with the strengthening economy there will boost the greenback’s value.
Expect our central bank to move on its overnight rate before the Fed does, Sutton said.
- Why isn’t the Canadian economy growing faster?
- How financial advisors view the economy
- Is the Canadian dollar headed to 86¢?
- Managing currency risk
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