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Why the Canadian dollar’s decline isn’t over yet

Canadian Dollar

Devon Yu

Weaker commodity prices and soft economic growth are causing the loonie to lose its lustre.

The Canadian dollar traded near a seven-month low, at 98.18 cents (U.S.) Thursday, with five days in a row of losses bringing the currency to its lowest level since last July. So far this year, it's sunk 2.6 per cent against its U.S. counterpart.

Several factors explain the souring mood about the currency, which traded as high as $1.04 just five months ago. Lower prices for crude oil and several other commodities are weighing on the dollar. Recent economic data has pointed to slow economic activity. Interest rates are low and likely to stay low through this year. And investors are snapping up the U.S. dollar in both a flight to safety and amid broader expectations a recovery in the world's largest economy is taking root.

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Some still think the Canadian currency is overvalued. Peter Hall, chief economist of Export Development Canada, said Thursday fundamentals suggest the dollar should be trading at about 95 cents.

"The Canadian dollar's recent downward drift makes sense," he wrote in a weekly note. "It looks like its medium-term [ie for the next five years] home will be at the mid-to-high 90-cent level – possibly lower."

Good timing, he added, as much of Canada's economic growth this year will rely on exporters as the domestic side weakens, hit by a slowing housing market and as debt-laden consumers restrain spending. A weaker dollar typically benefits exporters because it makes their goods more competitive in international markets.

Canadian export levels have yet to return to pre-recession levels and the Bank of Canada thinks they won't until the second-half of next year due to a host of challenges, among them tepid foreign demand and a still-strong currency.

Still, the loonie might be poised for further softening, noted the IMF recently, which has also said the loonie is overvalued.

It too noted the positive offshoots of a weaker currency. "Over time, as the U.S. economy strengthens and commodity prices moderate, we would expect some natural depreciation of the Canadian dollar, which will help boost exports and economic growth," it said last week.

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About the Author

Tavia Grant has worked at The Globe and Mail since early 2005, covering topics from employment and currency markets to trade, microfinance and Latin American economies. She previously worked for Bloomberg News in Toronto and Zurich, writing on mining, stocks, currencies and secret Swiss bank accounts. More

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