From slowing global growth to geopolitical uncertainty, the new year offers plenty for investors to worry about. But on one front, Canadian investors can sleep tight: currency risk for foreign investments is low, because the loonie likely won’t be leaping.
“We don’t see the Canadian dollar being very strong in 2020,” said Luc de la Durantaye, chief investment strategist and chief investment officer, multi-asset and currency management, at CIBC Asset Management. “Therefore, currency losses for a Canadian investor investing abroad — we don’t see a major risk there.”
One factor supporting his outlook is the relatively small difference in valuation between the loonie and U.S. dollar.
“The Canadian dollar is somewhat undervalued versus the U.S. dollar — about 8%–10% undervalued, which is not very large,” de la Durantaye said.
He also noted the challenge of Canada’s current account deficit, which continues to widen as exports tumble. “We need a weaker dollar, or an undervalued dollar, to improve our deficit,” he said. “So that’s not a big supporter of a stronger Canadian dollar.”
He added that monetary policy is unlikely to move the exchange rate between Canada and the U.S. While the Federal Reserve cut its key policy rate three times in 2019 and the Bank of Canada stood pat, divergence isn’t expected this year.
“We don’t see a lot of difference between the Federal Reserve and the Bank of Canada coming into 2020,” de la Durantaye said. “Both central banks are likely to be on the sideline for most of the year.”
The Bank of Canada makes its next policy rate announcement on Wednesday; the Federal Reserve, on Jan. 29. Both are expected to maintain their rates. Some of the big banks forecast a Bank of Canada rate cut in the first half of 2020, and Scotiabank forecasts a potential cut by the Federal Reserve in the third quarter.
The relatively weak economic outlook is another reason not to expect a strengthening loonie. While the Canadian economy generally performed well in 2019, the new year could see that performance reverse.
“Certainly, the Canadian economy has finished the fourth quarter of 2019 in a weak zone,” de la Durantaye said, citing plunging retail sales in October (the most recent month for which data are available). “So that element as well doesn’t provide a big strength for the Canadian dollar.”
Even last week’s progress on trade deals — the U.S. Senate passed the U.S.-Mexico-Canada deal, and the U.S. and China signed phase one of a trade deal — probably won’t move the needle much on Canada’s economic outlook. While the USMCA provides some certainty for Canadian exporters, TD Economics said in a report on Friday, the U.S.-China deal could have negative spillover effects for them as China refocuses its imports on U.S. producers, particularly for agricultural products.
Considering these factors, de la Durantaye said he expects the loonie to trade between US$0.75 to US$0.77 this year.
As such, “From a Canadian investor’s perspective, one has to think that investing abroad is not a big hurdle,” he said.
This article is part of the AdvisorToGo program, powered by CIBC. It was written without input from the sponsor.