Loonie poised for pummelling in early 2014

It will cost Canadians more to travel and shop in the U.S. next year with the value of the loonie set to drop further against the American greenback.

Economists are forecasting the Canadian dollar to fall to about 90 cents US in the months ahead, from about 94 cents where it sits today, as the economy stagnates and investors increasing turn their attention to U.S.

The net short position against the Canadian dollar is now valued at about $5.4 billion, the largest amount since the spring, according to Bank of Nova Scotia chief currency strategist Camilla Sutton.

“It highlights that investor sentiment is negative,” she says.

The rise comes on the same day Statistics Canada reported foreigners were slowing their investment in Canada to about $4.5 billion worth of Canadian equities in October, down from $10.7 billion in September.

While stock prices were up 4.5 per cent in October, their highest level since May 2011, StatsCan says the Canadian dollar fell 1.2 cents against the U.S. between September and October. The dollar has been falling steadily from its perch at par, where it started the year.

Sutton forecasts the Canadian dollar will drop to about 90 cents by mid-2014, and could even dip briefly to about 88 cents, as currency markets “have a way of overshooting.”

The loonie is then expected to return to its current 94-cent level a year from now, as the Canadian economy picks up steam.

“Typically what’s good for the U.S. economy tends to be good for the Canadian economy,” she says.

Bank of Montreal senior economist Benjamin Reitzes has a similar forecast for the Canadian dollar, but predicts its recovery will max out at about 92 cents by the end of next year.

He blames “Canadian economic mediocrity” for the weakening loonie, especially compared to the pickup anticipated south of the border.

The Bank of Canada is forecasting Canada’s gross domestic product to inch forward 2.3 per cent in 2014, up from a forecast of 1.6 per cent this year. That estimate was revised from earlier forecasts of 2.7 per cent for 2014.

CIBC World Markets economist Andrew Grantham says strong U.S. economic growth and tapering of quantitative easing by the Federal Reserve expected early next year will push the loonie to about 91 cents US in the coming weeks.

“A more dovish Bank of Canada under [governor Stephen] Poloz, concerned about persistently low inflation and leaving the door to a rate cut ajar, will also weigh on the Canadian dollar,” he said in an email.

CIBC is more bullish on the loonies’ comeback though, expecting it to rise to 95 cent by this time next year.

“The above-consensus growth we expect in the U.S. next year should support Canadian exports, seeing the trade balance improve and the currency firm,” he says.

The rise and fall of the loonie is good timing for budget-conscious Canadians looking for a sunny Florida vacation. Best to book something soon, or wait again until next winter.