Canada’s ‘loonie’ will continue to slide

The Canadian dollar (or ‘loonie’) is on the slide. In the past year it has dropped by 10% against the US dollar, hitting a four-year low of C$1.10. This is partly down to weaker commodity demand.

Canada’s wide range of raw materials, and emerging markets’ voracious appetite for them, lifted the loonie from around US$0.62 in 2002 to US$1.10 in 2007. The currency also benefited from ‘safe haven’ demand, with central banks diversifying into the loonie as an alternative to US dollars and euros. But with Europe looking more stable, this prop has gone.

Meanwhile, Canada’s economy has weakened now that a period of credit-fuelled consumption is ending. Many economists expect an interest-rate cut as a result, whereas US monetary policy is heading in the opposite direction, says Delphine Strauss in the FT.

Finally, close links to the US normally mean Canada benefits from upswings there. But years of grappling with a strong currency have made Canada’s manufacturers less competitive, shrinking the sector.

Oil transport bottlenecks also mean that Canada may benefit less from the US recovery than it has previously. It all suggests the loonie’s slide will continue. Morgan Stanley sees the US dollar buying C$1.19 by the end of 2015.

Merryn

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