Dips ahead for loonie and USD

The loonie surged in Q1 due to factors such as rising oil prices.

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But the currency could soon see another decline, says Luc de la Durantaye, first vice-president of Global Asset Allocation and Currency Management at CIBC Asset Management. He manages the Renaissance Optimal Inflation Opportunities Portfolio.

He has been surprised by the CAD’s strength, he adds, and says recent gains haven’t necessarily been a good thing (the loonie is currently sitting just under US$0.80). “The Canadian dollar’s rally has almost eliminated its undervaluation.”

This is a problem, he explains, because “we need an undervalued dollar to be able to rebalance the external sector from a deficit to a surplus. That [will only] come with a renewed weakness in the Canadian dollar from a fundamental perspective.”

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One reason the loonie could fall back versus the USD is the oil market is still oversupplied, despite recent price gains, says de la Durantaye. “The Canadian dollar [could] remain strong, but we would think [it] could give up some of its recent gains” if oil prices dip.

Read: Loonie won’t fully recover until end of 2016

Overall, he says, “We’ve moved from an environment of cyclical decline of the CAD to one where there’s starting to be consolidation.” This means the loonie’s value could remain stagnant, with traders waiting for economic data or developments to hint at which way the currency will move.

What about the USD?

So far, the U.S. dollar is still going strong, says de la Durantaye. “Part of the strength of the Canadian dollar has been related to the USD. The cyclical strength of the USD has been so strong for the last two years that it’s starting to inflict some pain on the U.S. economy.”

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Going forward, he predicts that will change. The prolonged overvaluation of the U.S. dollar has cooled the Fed’s tightening cycle, he explains, but “the outlook for the USD is more complex than what we’ve seen over the last two years, which was a full bull market against most currencies.”

Now, “We see more of a trading range in the U.S. dollar, and that’s going to be important in the global economic environment.”

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