The days of the Canadian dollar at par with the American greenback are over for now.
Many banks forecast a loonie in the low 90 cents US for this year.
It is not a bad thing for the export-oriented part of Canada’s agricultural sector because a weak loonie can stimulate exports and support on-farm prices for grain and livestock.
However, the positive effect of the weak loonie is mostly lost with the grain transportation system apparently at capacity and falling well short of demand this year.
Why did the loonie depreciate by 6.6 percent against the U.S. dollar last year?
Canada’s economy outperformed its competitors in the Group of Eight when the recession hit in 2008. However, it is now struggling compared to the U.S., which appears set for solid economic gains this year.
The struggle was amply illustrated last week when Statistics Canada reported that the economy shed almost 46,000 jobs in December instead of posting a modest gain of 14,000 as analysts had expected.
Canada’s trade deficit data released last week also showed weaker than expected performance. As well, inflation remains well below the Bank of Canada’s target.
This adds to the expectation that the central bank will keep its interest rate at one percent, where it has been since 2010. A few observers even speculate that the bank may be forced to lower its interest rate if economic statistics get worse.
This is in stark contrast to the United States, where improving economic measurements caused the Federal Reserve to begin trimming its stimulus program, although a disappointing December jobs report also creates questions about how quickly the U.S. central bank will act.
As interest bearing investments start to pay more in the United States than in Canada, the loonie will weaken against the greenback.
This situation is widespread, with the euro, yen, pound and Australian dollar weakening as the U.S. economy gathers strength.
Another factor working against the Canadian dollar is falling crude oil prices and America’s move toward energy self sufficiency. Fewer American dollars will flow into Canada to pay for our oil, which hurts the trade balance and weakens the loonie.
The major Canadian commercial banks expect hard times for the loonie this year.
BMO expects the dollar to inch toward 90 cents. ScotiaBank sees the Canadian dollar trading at 92.5 to 93.5 cents through 2014 and holding around 93.5 cents in 2015.
CIBC sees the loonie falling to about 90 cents early this year but then staging a modest recovery.
The Royal Bank has the most negative outlook of the major banks. It sees the loonie losing ground through this year to 91.7 cents US by the fourth quarter and further deterioration in 2015, falling to 87 cents by the fourth quarter.
Most analysts believe the weaker loonie and the strengthening U.S. economy will stimulate job creation and exports here, eventually pulling Canada’s economy out of its funk. However, Ontario’s battered manufacturing sector might take a long time to heal.
With more robust Canadian growth in 2015, the loonie should climb back into the mid 90s in 2015.