Canadian dollar will drop to 59 cents US in 2016, Macquarie forecasts

A day after the loonie slipped below the 70-cent US level for the first time since 2003, a forecaster at investment bank Macquarie says he expects the loonie to lose another 10 cents to reach an all-time low of 59 cents by the end of 2016.

David Doyle of Macquarie Capital Markets Canada Ltd. lowered his Canadian dollar forecast to 59 cents US on Tuesday. That would eclipse the all-time low for the loonie, set on Jan. 21, 2002, at 61.79 cents US.

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Doyle knows of what he speaks. Last February, when the Canadian dollar was valued at just over 80 cents, he — correctly, as it turns out — predicted the loonie would hit 69 cents US at some point in the next 12 months.

It did so Tuesday.

"Once [the loonie] reaches this level," Doyle said, "it should remain subdued through [the end of] 2018 and potentially even longer."

Doyle's new forecast doesn't see the loonie above 65 cents US at any time between the end of 2016 and the two years that follow.

The loonie has been whipsawed of late by oil and the U.S. dollar. Oil prices can't find a bottom, with a barrel of the North America crude oil benchmark dipping below $30 a barrel for the first time in 13 years on Tuesday. That's dragging the loonie down with it, as Canada's dollar is widely considered to be a play on oil prices.

But strength in the U.S. dollar is making the loonie look even worse.

Economic uncertainty makes investors flock to assets perceived as safe, and for the most part none are perceived to be safer than the U.S. dollar. That drives up the greenback's value. So while the Canadian dollar is sliding lower compared to most currencies, it looks especially cheap compared to the U.S. buck.

Doyle's bleak outlook for Canada doesn't stop at the loonie, however.

Rate cut coming?

The Bank of Canada is set to reveal its latest interest rate decision next week, and Doyle is among a strong minority of analysts who expect a cut to 0.25 per cent from its current level of 0.5. But he goes even further, saying another cut bring the central bank's lending rate to zero per cent some time this year is "a possibility."

"The rapid weakness in [the loonie] means that Canada should experience comparably elevated inflationary pressures relative to the United States over the next 12 months," Doyle said.

David Madani, from Capital Economics, also expects the Bank of Canada to cut its key rate by a quarter of a percentage point next week. 

In a Wednesday commentary, he said new data suggests that the Canadian economy contracted in the final quarter of last year. 

"Not only this, the further plunge in commodity prices — led by oil — over the past month or so has completely undermined prospects for economic growth this year," he said.

TD chief economist Beata Caranci makes much the same argument in a Wednesday report, saying "a case exists" for a rate cut on Jan. 20.

"However, if the Bank [of Canada] decides to stand pat to observe the degree to which recent economic weakness is transitory in nature, the focus will turn to the forecasts within the [monetary policy report], and a rate cut down the road remains entirely plausible," she writes.

Mixed blessing

In the past, a cheap dollar was a mixed blessing for the Canadian economy: a boon for exporters, but bad news for importers and Canadians who need to travel or spend money outside the country.

But the gains to be had from a cheap dollar often take a while to show up. The pain, on the other hand, is almost immediate.

As Bank of Montreal economist Doug Porter asked in a note on Tuesday, "What does it mean for the economy?"

"Consumers benefit, a tad, from the drop in energy prices, but are no doubt hurt by the dollar's slide. And, the blaring headlines about a sub-70 cent dollar are likely to [hit] confidence further," he said.