The high-flying loonie is poised for a drop as commodity prices buckle, Canada's trade position deteriorates and a slowdown in U.S. economic growth dampens demand, a bank report said Friday.
The Bank of Montreal is scaling back its bullishness on the currency, which has soared 41 per cent over the past four years against the greenback. The loonie is the world's fifth-strongest currency over that time period, according to Bloomberg analytics.
“The headwinds for the currency are mounting, and we believe the loonie is in the process of topping out and will be weaker a year from now,” said Douglas Porter, BMO's deputy chief economist, in a report.
He listed five reasons for a decline.
Soaring commodity prices, which pushed the loonie higher earlier this year, have since swooned. The currency has yet to reflect those declines, however.
Canada's trade picture is “showing signs of strain,” the report said, noting that auto trade hit a record deficit in July. As exports dwindle, imports show few signs of abating, which points to a shrinking trade surplus.
The U.S. economy is slowing, meaning demand for Canada's resource may weaken.
The gap between U.S. and Canadian economic growth has widened in recent quarters. Sluggish growth will likely keep the Bank of Canada on the sidelines, while Federal Reserve officials maintain a bias towards higher interest rates, suggesting a widening rate spread between the two countries.
Canadian capital has been flowing out of the country, since the foreign content limits on pensions were removed last year.
These factors indicate the loonie's allure may be diminishing. The report's conclusion: “If major commodity markets remain soft, let alone weaken further, the loonie is poised to finally retreat.”
The Canadian dollar traded at 89.16 cents (U.S.), down from yesterday's close of 89.46 cents.
© The Globe and Mail
