Loonie among world's worst performing currencies with more pain likely on the way

The Canadian dollar is one of the world’s worst performing currencies so far this year, falling faster than experts predicted even a few weeks ago, thanks to plummeting oil prices and Canada’s weakening economic outlook.

The loonie, which is the nickname for the Canadian dollar, has fallen below 80 cents US for the first time in nearly six years, and forecasters are calling for a further drop to around 75 cents (U.S.) since the Bank of Canada’s surprise benchmark interest-rate cut last week.

That quarter-point cut to 0.75 per cent — and growing speculation the Bank of Canada could cut rates again in the near future as oil prices keep falling — is putting added pressure on the loonie.

“The environment has turned rapidly against [the Canadian dollar] and we are likely to see ongoing weakness in 2015,” Camilla Sutton, Scotiabank’s chief currency strategist, said in a note released Thursday.

Sutton noted the value of the loonie has fallen 7 per cent so far this year against the U.S. dollar, making it the “worst-performing primary currency.” The Canadian dollar has dropped 15 per cent since July.

Scotiabank is scheduled to update its currency forecast next week, but in an interview Sutton suggested the direction is down.

“Every indicator would suggest the Canadian dollar is likely to weaken further and it’s very much tied to the price of oil,” she says. “It’s incredibly volatile.”

The falling dollar is good news for Canadian exporters and people with U.S. dollar investments, but will likely translate into higher prices for a wide range of imported consumer products such as food, clothing and cars.

That winter getaway to sunny Florida is also getting more expensive, and Sutton said consumers need to think more carefully today about currency changes in their budget planning.

“Even though a lower Canadian dollar is very positive for the economy, extreme volatility is difficult for many to manage. It becomes difficult to prepare for,” she says.

Some economists say there’s still time for consumers and businesses to prepare.

Capital Economics economist David Madani is forecasting a “modest bounce back in the price of oil,” and predicts the Canadian dollar will stay close to 80 cents US in 2015.

“But with domestic economic conditions expected to worsen relative to an improving U.S. economy, it won’t be long before the Canadian dollar tumbles further,” he said in a note, forecasting a drop to 75 cents (U.S.) in 2016.

That’s consistent with a call made earlier this week from TD Bank, which sees the loonie dropping to 75 cents US by about this time next year, before bouncing back to 85 cents US by the end of 2016.

Economists at CIBC expect the Canadian dollar to slide to 77 cents (U.S.) by this summer and believe the Bank of Canada will cut its benchmark interest rate another 25 basis points given its “evident impatience with respect to oil’s hit to growth.”