Loonie likely to remain weak
The loonie limped into the New Year and some experts are warning Canadians they’ll have to get used to a weaker dollar after a year that saw almost nothing but bad news for Canada’s currency.
The dollar fell below the 74 cent threshold for the first time since May 2017 in midDecember, after the U.S. Federal Reserve sounded a lessdovish-than-expected note during its latest rate hike announcement. It closed at 73.3 cents on Monday.
It is now more than eight cents below the high of 81.60 cents to the greenback it reached in January and four below its 2018 average of 77 cents.
Canadians, according to Sun Life Global Investments chief investment officer Sadiq Adatia, should start getting used to a weaker currency in 2019.
“I think we see some more downward pressure here,” Adatia said. “It’s going to be a slow grind down.”
Sun Life’s forecast has the loonie pegged at 70 to 75 cents by the end of 2019, with a bias closer to the lower end of that range, Adatia said. Not only is Adatia expecting investors to continue to move toward the U.S. dollar, which would automatically weaken the loonie, he also suspects the Canadian economy may not be as strong as it appears.
Employment numbers in particular, Adatia said, could drop and there would be no other catalyst to pick up the economy in its wake.
With the Bank of Canada pausing rate hikes in December and the Fed taking a more aggressive tone than expected, the loonie was “destined to sell off,” BMO senior economist Robert Kavcic said. Both central banks are expected to raise rates twice in 2019, cancelling one another and nullifying any potential pain to the loonie.
“Then the wild card is what happens with oil prices,” Kavcic said, adding that they’re going to hit a bottom soon. If oil prices bottom out, they’ll become rangebound. So too will the loonie, he said.
As a result, Kavcic doesn’t expect much movement on the loonie in 2019 — up or down. BMO forecasts have it staying flat at 75 cents through 2020. Kavcic’s projection would mean the loonie would stay undervalued — but that shouldn’t concern investors too much.
“It’s not egregiously cheap,” he said. “Our rate spreads are a bit negative versus the U.S. so you would fundamentally expect a little bit of undervaluation of the currency in a stable environment once this all blows over.”