It’s been a rough start to this New Year for the Canadian dollar, as it dipped below the 70-cent U.S. level yesterday— and now there are predictions of an even lower loonie.
Analyst David Doyle of Macquarie Capital Markets Canada Ltd. says he expects the loonie to lose another 10 cents, for a forecasted value of 59-cents U.S., by the end of 2016. Even worse: Doyle doesn’t expect the loonie’s value to climb above 65-cents U.S. for the next two years. His predictions centre on the fact that as a net-exporter of oil, Canada’s economy has been hit hard by falling commodity prices.
Do his predictions hold water?
Not according to David Madani, senior economist at Capital Economics Ltd. “The markets are overreacting,” says Madani. “When prices are up, the boom will go on forever and when prices are down, we become overly pessimistic.” He doesn’t see a 59-cent loonie by the end of 2016.
Instead, Madani predicts higher oil prices and a rising loonie by the end of the year. “I’m not expecting $100 a barrel, but oil prices have fallen too far from fundamentals, so there’s room for some price recovery,” says Madani. He suggests $60 to $80 a barrel by the end of 2016 or by 2017. “It might take a year or two but oil prices should recover.” Rising commodity prices will help the loonie recover—and Madani suggests the loonie will bounce back to it’s 75-cent U.S. mark within the next 12 months.
Madani’s predictions shouldn’t be ignored. In 2014, Madani and Capital Markets Ltd. accurately predicted the slowing of the Canadian housing market due to a slump in oil prices. “We didn’t predict $30 a barrel,” but a price drop was imminent, says Madani. Then OPEC’s decision not to cut production in late November 2014, signalled the start of plummeting oil prices. Since then, most real estate markets in Canada have either stabilized and become balanced markets or, like the more oil-dependent cities like Calgary, Fort McMurray and Edmonton, experienced a housing price correction.
Guess what? The loonie is doing its job
“The Canadian dollar is a buffer, a cushion,” explains David Madani, senior economist at Capital Economics Ltd. “In the last year, policy-makers put on a brave face: Claiming that our nation’s economy is well diversified. The drop in the loonie’s value just reflects the data and the evidence that our economy is really struggling.”
As a buffer, the loonie loses buying power as commodity prices continue to drop and the U.S. economy gathers steam. In effect, the loonie is the antidote that helps keep Canada’s economic environment attractive to investors. But with this antidote there are winners and losers.
Manufacturing industries that export to the U.S. and are not tied directly to commodities will get a bit of a boost, says Madani. Also, as the housing market continues to remain stable in most Canadian cities, the construction and forestry industry will also continue to prosper. “But there’s not enough growth in these industries and it’s not happening fast enough,” says Madani, to really help pull Canada out of the current low-growth slump (which is one reason why the loonie continues to cushion our nation’s economy and drop in value).
The current low loonie, however, isn’t bad news for every Canadian. Those involved in tourism-related businesses will probably see a boost in sales as Americans return to visit us north of the border.
Real estate sales should also see a boost as American investors return for cheaper Canadian investment and vacation properties.
Those shopping for consumer goods—including vehicles and electronics—can cash in on savings as prices for Canadian-sold products drop.
Investors already in the U.S. stock market will also see some gains, as investment returns start to reflect the economic growth in companies south of the border.