Which way is the loonie headed?

It’s anybody’s guess where the loonie will go next.

But its direction hinges on energy prices and interest rates, says Benjamin Tal, deputy chief economist of CIBC World Markets.

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“Since oil prices seem to have stabilized, it’s a real possibility we’ll see a modest rebound during the second half of the year,” Tal says. “That will be a positive for the Canadian dollar.”

As far as interest rates go, the Bank of Canada might cut rates further—even while the U.S. Federal Reserve is considering raising them. “That’s a negative,” Tal adds.

Read: Which stocks benefit from a weak loonie?

He says the Canadian dollar might lose one or two cents over the next few months, but then rebound. He sees the loonie oscillating between 76 cents and 77 cents in the next six months, and then rising to 81 or 82 cents.

Read: Is U.S. dollar too dominant?

“This means, when it comes to equities, investing in the U.S. will be more profitable than in Canada,” says Tal, who’s bullish on the U.S. because its economy is on the upswing. Also, investors looking south of the border could benefit from the weakening Canadian dollar.

Other currencies

While the greenback weighs on the loonie, Tal anticipates the Canadian dollar will hold its own against the Euro. “I don’t see the euro recovering,” he says.

“But with the European Central Bank already having cut interest rates, and going with full-scale quantitative easing, it’s difficult to see the euro losing significant ground.”

Read: The pros and cons of currency hedging

When it comes to Great Britain’s pound, however, Tal predicts the currency will surprise to the upside. Even though the Bank of England is not planning any rise in interest rates, he says, “there’s significant prospect of [the BoE] raising interest rates before the Bank of Canada.”

If that happens, Tal adds, the scales will tip in favour of the pound.

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