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Canadian dollar could take a dive in 2017, experts say

[The loonie could see a big drop in 2017/Getty Images]

Canadians travelling to the United States or buying goods south of the border in 2017 could expect to pay more as the Canadian dollar is expected to retreat, with some economists saying the loonie could swing as low as 70 cents US.

According to several recently released forecasts, the Canadian dollar is expected to fall against the backdrop of several factors: a U.S. economy gaining speed, interest rate hikes by the U.S. Federal Reserve, and oil prices that are projected to remain soft.

The loonie stood at 74.10 cents US at the close of trading on Wednesday after slipping 0.23 of a cent.

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Scotiabank said it sees the loonie dipping to 71 cents in the second quarter of next year before returning to its current level of 74 cents by the end of the year.

CIBC is projecting the dollar to slip to about 72 cents in the first quarter of 2017 before ending the year with a recovery of about one cent, while JPMorgan Chase predicts a 70-cent loonie by the middle of next year, then to remain between 70 and 71 cents in the latter half of the year.

Economists at Desjardins are forecasting the loonie to end 2016 at 73 cents US, and then slide to 70 cents US by the end of next year, with the election of Donald Trump as the next U.S. president playing a major role in the dip.

"Everything seems to be in place for a long climb by the greenback," Desjardins said in a release. "The U.S. economy's acceleration and monetary policy divergence will be its main support."

Trump's stated plans to cut taxes and ramp up infrastructure spending is expected to boost the U.S. economy, and the Federal Reserve is expected to boost U.S. interest rates, which could draw investors toward the U.S. greenback.

Desjardins did caution that there is a lot of uncertainty surrounding the outlook for the loonie, however, "as the future U.S. administration's exact game plan is not known."

'One more leg to run'

Forecasters pointed out that the the loonie has been on a downward trend since Trump's election win, losing about one per cent since Nov. 8.

The loonie' s weaker trend "has one more leg to run," said economists at CIBC.

"There's only so much economic juice to be squeezed out of indebted consumers, and government policy is starting to lean against a further housing boom," they said.

In its most-recent monetary policy update, the Bank of Canada said it expects consumer spending — a key economic driver — to remain solid. But it sees activity in the housing market weakening as federal and provincial governments move to cool overheated markets.

No rush to hike rates

"With oil prices still too tepid, a weaker Canadian dollar, encouraged by dovish monetary policy, has been seen as key to shifting growth towards non-energy exports and related capital spending," CIBC said.

That "dovish" monetary policy is a reference to the Bank of Canada's stance of leaving interest rates unchanged, as Canada's central bank has seen little need lately to raise rates. 

Conversely, some economists don't see the Bank of Canada pushing rates down.

"While our own forecast sees [Bank of Canada governor Stephen] Poloz eschewing an ease, it would take only a small downside miss to our growth forecast … to prompt such a cut," said CIBC. "Any increase in concerns over Trump protectionism versus Canada would also be reason enough for an ease."

Fed rate hikes expected

With the U.S. Federal Reserve almost certain to raise rates in December, and markets expecting more hikes to come, Desjardins said widening spreads between interest rates in Canada and the U.S. will weigh on the loonie.

"We have also revised our projections for oil prices given the persisting production surplus in this market," economists at the Montreal-based financial institution said. "Oil prices promise to rise even more slowly than initially forecast, lessening the chance of a loonie rebound." 

A lower loonie against the U.S. greenback is not all bad news for Canadians. A lower dollar would make Canadian exports cheaper for U.S. buyers, and the Bank of Canada has been counting on export growth to lift the economy.