Analysts Predict Falling Canadian Dollar in 2008 and 2009

With strong commodity prices and the spread between short-term Canadian and U.S. interest rates holding around 100-basis points, the loonie continues to trade close to parity with the greenback. And while the situation is expected to remain the same in the near term, RBC thinks support for the U.S. dollar will emerge sometime in the middle of 2008, bringing the Canadian dollar down to an average of $90.9 by the end of the year, and dropping to $87.0 by the end of 2009.

RBC chief economist Craig Wright said this shift will likely begin when markets anticipate a “turnaround in the U.S. economy and a cessation of Fed easing.”

The Bank of Canada cut interest rates by 25-basis points at each of its December and January meetings, then eased another 50-basis points in March, bringing the overnight rate to 3.50%.

RBC expects rates will be lowered to 2.75% by mid-2008 “to mitigate downside risks to the growth outlook coming from a weakening U.S. economy, tight credit conditions and a strong Canadian dollar,” Mr. Wright said in a research note.

The currency forecast is quite different over at BMO Capital Markets. On Tuesday, Senior economist Michael Gregory predicted that the loonie would end this year at an average of approximately $0.97, and roughly $0.95 by the end of 2009.

In a note he said:

Fears of U.S. weakness spreading north and a pullback in commodity prices have backed the loonie away from par. Look for the Canadian dollar to meander around current levels with a weaker bias through 2008.

Mr. Gregory thinks the greenback will have trouble gaining traction as long as the Fed’s easing campaign continues, but relief from financial headwinds should provide a boost.

BMO also expects the Bank of Canada to continue easing in April with a 25-basis point cut to interest rates, eventually bottoming at 2.75% by the summer.

Comments

[rainman]

The following-suit-attitud... to the Fed by Bank of Canada will for sure squeeze the Lonnie, of which the main purpose is to get more epxort to US.

Interestingly, the Australians, whose currency is also in the commodity territory, has a different policy as to keep their rate high to avoid inflation, while they raise their oar exporting by 65% each year, mostly selling to the Bao Steel, China.

Which policy is smarter? Time will tell.