Loonie won’t fully recover until end of 2016

Since the loonie hit mid-January lows, it has gained significantly due to recent oil trends and a weaker U.S. dollar. But this gain may be short-lived.

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That’s because the outlook for the loonie is bleak for 2016, says Vincent Lépine, vice-president of global economic strategy (asset allocation and currency management) at CIBC Asset Management.

“The Canadian dollar will [remain] weak, probably revisit[ing] lows that were reached not that long ago,” he says. “[It] will continue to trade around low levels for quite a while, [so] you’re more likely to get a long consolidation phase,” as opposed to a quick, sustainable rebound.

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One reason is the Bank of Canada has been depreciating the loonie. “The objective is to be more competitive. Being more competitive means exporting more to the rest of the world.”

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However, Lépine explains, “The BoC has not been successful, even though the currency had gone down significantly.” Its depreciation of the loonie has done little so far to “cushion the downturn in Canadian economic activity via better export numbers.” As such, the Bank may not be finished with its plan to depress the currency.

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Plus, the loonie has room to fall further. “The BoC has been running out of leeway [and] rates are already close to 0%, so you can’t cut interest rates a lot more.” But there’s also talk of whether the Bank can go negative, given “the Canadian dollar [has] already [been] quite undervalued against the U.S. dollar.”

Read: BoC would consider sub-zero rates in a crisis

He expects the Canadian dollar will pick up slightly by the end of the year. However, warns Lépine, “Don’t expect too much of a recovery. Currency has to stay undervalued for quite a while to finally [have an] impact on [export] competitiveness and on all our exports,” including non-oil exports to the U.S.

Read:

Why the loonie will remain weak in 2016

Investors running out of safe havens

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