In May, the loonie declined for the fourth consecutive month against the U.S. dollar, sitting at 1.35 USDCAD on Friday. Recent economic reports outline what’s holding Canada’s dollar down and where it will land by year-end.
Several factors play into the loonie’s challenges, including declining oil prices and a lack of market confidence reflected in waning capital inflows.
“Canada and its currency are largely dependent on capital inflows to finance a chronic current account deficit which reached 3.1% of GDP in the first quarter,” said National Bank is its latest foreign exchange report, published Friday. With Canadian direct investment abroad in recent quarters being greater than foreign direct investment in Canada, the loonie has suffered.
National Bank also noted that investor sentiment failed to be propped up this week as the central bank issued a “measured” statement when it held its key rate.
Looking ahead, the biggest risks for the loonie are a further deterioration of the global economy and a corresponding oil price drop, the report said. On the positive side, National Bank expects U.S.-China trade woes to improve, which would reverse investor sentiment.
A weekly CIBC report cited U.S.-Mexico trade as another factor negatively affecting the loonie. On Friday, U.S. President Trump doubled down on his threat to slap a 5% tariff on Mexican imports unless America’s southern neighbour cracks down on Central American migrants trying to cross the U.S. border. The tariff is set to take effect on June 10, and adds to the uncertainty for the new North American trade deal.
“If, hopefully, those threatened tariffs are not imposed, a reduction of trade uncertainties and an improving Canadian growth picture over the summer could lead to a short-term rally in the loonie,” the CIBC report said.
National Bank forecasted better economic growth for Canada in the second quarter, after only 0.4% growth in the first.
“If, as we expect, Q2 growth ends up being better than the 1.3% print the Bank of Canada is currently estimating, that would likely get markets to reduce any remaining expectations of rate cuts this year, boosting the Canadian dollar in the process,” it said.
National Bank says its end-of-year target for the loonie remains unchanged at 1.30 USDCAD, assuming global trade tensions don’t increase.