How far can the loonie upswing go?

Luc de la Durantaye expects the Canadian dollar to appreciate in the coming months, possibly returning to early-2018 highs of around US$0.81 on the back of a bolder Bank of Canada.

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The head of asset allocation and currency management at CIBC Asset Management cautioned about getting too excited about the loonie, though. “We don’t want to overplay that,” he said in an early October interview.

Still, his outlook is positive for the Canadian dollar, as investors have “more confidence from the Bank of Canada (BoC) that they will continue on the path of raising interest rates.”

The central bank is widely expected to hike interest rates at its Oct. 24 announcement. Following the release of an upbeat Business Outlook Survey for the fall, several bank analysts said now is the time to hike based on economic strength and improving executive forecasts.

While the BoC won’t quite match the pace of the Federal Reserve when it comes to raising rates, said de la Durantaye,  “at least there’s a recalibration […] which will support the Canadian dollar.”

On Oct. 16, the loonie was worth US$0.77, around its one-year average (the low over that period was US$0.75 and the high was US$0.81).

Once the loonie regains the ground it lost this year—and possibly hits US$0.82—it may face headwinds, said de la Durantaye, who manages the Renaissance Optimal Inflation Opportunities Portfolio.

“We can’t afford to have too strong a dollar, and certainly not an overvalued [loonie] versus a U.S. dollar, given the fact that we have a current account deficit,” he said.

Canada also trails the U.S. in productivity, he added, which “will limit the appreciation of the Canadian dollar.”

Economic outlook

From low unemployment to a positive investment outlook, the domestic economy is performing well, said de la Durantaye, who also highlighted wage growth as a factor benefiting consumers.

Canada’s unemployment fell to 5.9% in September as the country added 63,000 jobs.

The tight labour market is contributing to a decline in household debt and, as a result, is reducing risk to the Canadian economy from the consumer side, said de la Durantaye.

The level of household debt relative to income fell slightly in Q2 from the previous year, Statistics Canada reported. Demand for consumer credit rose but that was offset by a drop in both mortgage and non-mortgage loans. Canadians owed $1.69 for every dollar of household disposable income for the quarter.

From the investment side, the new trade agreement between the United States, Mexico and Canada will bring in investment that was likely put on hold due to uncertainty, said de la Durantaye.

High oil prices are also helping maintain a decent economic outlook for Canada, de la Durantaye said. The price of Brent crude rose above US$81 on Oct. 16, compared to around US$57 a year earlier. The price of WTI crude has increased over the last year, from around US$51 last fall to more than US$71 on Oct. 16.

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