The Canadian dollar has plunged this year. And this might only be the beginning, according to analysts at Macquarie Capital Markets.
In July, the Canadian dollar dipped to its 11-year low against the mighty greenback. Right now, one Canadian dollar would only get you 76 cents in USD. Back in July 2011, a Loonie would get you more than one USD. That was a more than 28% depreciation for the Canadian dollar in four years!
Some might think that the dip of the Canadian dollar is just a temporary phenomenon in the currency market. However, David Doyle, analyst at Macquarie, believes that this is a reflection of a larger macroeconomic theme. (Source: Financial Post, last accessed August 21, 2015.)
The theme is this: the U.S. economy is going to continue to outperform the Canadian economy and this would drive the Canadian dollar to new lows against the U.S. dollar. Moreover, Doyle believes that the downturn for the Loonie could last up to 10 years.
The depreciation of the Canadian dollar is not really a surprise, as the country’s economy has been contracting. The low oil prices in the past year resulted in many Canadian companies having massive layoffs. According to Statistics Canada, the country’s gross domestic product (GDP) has been shrinking for five consecutive months. If the next report suggests a GDP decline, Canada would be officially in recession.
Doyle points out that the housing market could drive divergence between the two countries’ economies. In the U.S., momentum in the housing market is strong, and would be conducive to economic growth. In Canada, however, residential investment’s share of GDP is extremely elevated compared to that of the U.S., and is starting to decline, which could provide drag to Canada’s economy.
This is not the first time for an analyst to become bearish on the Canadian dollar. Last month, when the Canadian dollar was trading at $0.79 USD, Gluskin-Sheff’s chief economist David Rosenberg warned investors that the USD-CAD exchange rate could go to as low as $0.69.
Rosenberg’s argument was similar to Doyle’s. He noted that interest rates in the U.S. were poised to move higher thanks to the country’s booming economy. Canada, in contrast, is struggling, with central bankers expected to cut rates this fall.