Loonie in for more of a rough ride in 2015: economists

2015 is shaping up to be a year when more Canadians will choose to vacation and go shopping in their own country, thanks to the depreciating dollar.

The loonie has dropped about 10 per cent in 2014 — to around 85 cents US, its lowest level since 2009 — and economists are forecasting it will keep falling in 2015.

Canada’s currency will continue to be overshadowed by the strengthening U.S. dollar, and dragged down by lower oil prices.

Most Canadian economists are forecasting the Canadian dollar to plunge to about 80 cents U.S. into 2015, before bouncing back to 85 cents again at this time next year.

That has both positive and negative implications for the Canadian economy and consumers, depending on where you sit.

“A lower Canadian dollar doesn’t make it particularly interesting to travel abroad to the U.S. or to buy U.S. products over the Internet,” says Camilla Sutton, chief currency strategy at Scotiabank.

A lower loonie also makes Canadian exports more attractive to foreign companies, which Sutton says should help boost the economy.

“For the economy as a whole, a weaker Canadian dollar is a positive thing in the medium term,” Sutton says. “It’s just in the short term it’s not that attractive.”

While the Canadian dollar has weakened against the American greenback, Sutton says the loonie still looks good from an international perspective.

“Even though it’s a story where the Canadian dollar underperforms against the U.S., it’s one where it outperforms against currencies like the Euro or Japanese yen,” says Sutton, who is among the experts forecasting that the Canadian dollar will drop about 80 cents U.S. in 2015.

Keep an eye out for oil

The price of oil, which has dropped by nearly half in the past six months to around $60 U.S. per barrel, is what’s expected to put pressure on the loonie in the coming weeks.

Citing research from the Bank of Canada, a CIBC report notes that a 40-per-cent drop in oil prices causes the Canadian dollar to fall about 5 per cent against the greenback.

As a result, CIBC economists are calling for the loonie to slide to 81 cents U.S. in “the next few quarters,” which is 5 per cent below their previous estimates.

John Stephenson, a portfolio manager at Stephenson & Co. Capital Management, is predicting the loonie will fall slightly lower than most economists predict, to 79 cents next year.

He too cites depressed oil prices.

“As oil prices fall, so does our currency,” says Stephenson. “Foreign traders use it as another proxy to know when to short or go long on the Canadian dollar.”

Other factors expected to weigh on the dollar include the Bank of Canada’s timing on interest rate hikes, which are an indication of its economic health as compared to the U.S., according to economists at BMO Capital Markets.

“The triple-whammy of lower oil prices, a strengthening greenback and speculation about Bank of Canada policy lagging the [U.S. Federal Reserve] has weighed on the loonie,” says BMO deputy chief economist Michael Gregory in a recent report.

BMO is forecasting the loonie will be volatile, but end 2015 at around 84 cents U.S.

“The Bank finally following the Fed should be a stabilizing force for the currency in 2016,” BMO says.

The weaker loonie has provided some much-needed relief to Canadian exporters, and economists at RBC expect that to continue into 2015.

RBC is calling for the Canadian dollar to fall about 3 per cent in 2015 and 2016, with year-end values of 85 cents and 82 cents, respectively.

They also see oil prices stabilizing.

“Our expectation that the currency will remain under modest downward pressure in 2015 is based on our assessment that drop in commodity prices will cease as global demand recovers and that the spread between short-term interest rates will narrow as the Bank of Canada lags the U.S. Federal Reserve in boosting policy rates,” RBC economists said in a note.