Loonie’s latest rise will be shortlived: analysts

Things are looking brighter for the loonie – but not bright enough to make cross border jaunts as worthwhile as last summer.

“Where we are now at 80 U.S. cents, the price differential between the U.S. and Canada isn’t as attractive as it was when we were at parity or 95 U.S. cents,” Benjamin Reitzes, senior economist at BMO Capital Markets, told Yahoo Canada Finance. “That 20 per cent premium you’re paying now is probably going to be difficult to swallow for some people.”

Even still, the lifting loonie is welcomed after spending most of February, March and the first two weeks of April in the 79-to 80-U.S.-cent gutter against the greenback. In the back half of April, the Canadian dollar started to gain momentum, closing out the month around $0.83.

The loonie’s climb shows it’s still in a square dance with the price of oil, matching step for step.

“We’ve seen oil prices rebound nicely from their lows over the past couple of months,” says Reitzes. “You can chart oil on top of the Canadian dollar and you can see that they had pretty similar moves.”

The $59 WTI price is a 35 per cent rise from mid-March lows, but still down 40 per cent year over year.

Reitzes also contributes the buoyed dollar to the Bank of Canada’s decision to hold off on any rate hikes or cuts in the near term coupled with less-than-impressive growth in the U.S. In the first quarter of 2015, which saw GDP grow by a marginal 0.2 per cent.

“It doesn’t look as if the U.S. economy is quite as strong as everyone thought it might be at the start of the year,” he says adding that he suspects the greenback will strengthen if (or more likely, when) the U.S. Federal Reserve boosts interest rates in September.

In a research note, Scotiabank’s chief currency strategist, Camilla Sutton, and head of international economics Pablo F.G. Bréard, echoed Reitzes outlook, predicting a strengthening U.S. dollar.

“On a broad basis, we expect the USD to be vulnerable to further weakness during the second quarter, but to resume its appreciating trend during the second half of 2015,” they write. “The medium term outlook should still favour a USD rally, as growth outperforms, the Federal Reserve is the first major central bank to hike interest rates and investment flows prove supportive.”

Provided oil prices don’t plummet, Scotiabank forecasts the Canadian dollar to climb close to $0.85 this quarter before landing around 79 U.S. cents the end of the year.

CIBC World Markets sang the same tune, pointing to a 79-U.S.-cent loonie by year’s end.

“A re-tightening cycle in Canada after 2015 will be executed very slowly with the C$ in mind, as the Bank tries to limit the Loonie’s appreciation,” writes CIBC chief economist Avery Shenfeld in a research note. “The Loonie has gathered greater-than-anticipated strength from a wait-and-see approach from Poloz, but a competitive exchange rate will be needed for Canada to regain manufacturing capacity, and give a lift to non-energy exports.”