Posthaste: Why economists are cutting their forecasts for the Canadian dollar

Desjardins Group had predicted the loonie would hit 74 U.S. cents by the end of this year, but has now cut that forecast by three cents. Photo by Peter J Thompson/National Post

Article content

Article content

The Canadian dollar is losing ground, prompting some economists to cut their forecasts for the currency “substantially.”

Article content

Article content

Desjardins Group had predicted the loonie would hit 74 U.S. cents by the end of this year, but has now cut that forecast by three cents to 71.

Article content

“Our year-end USDCAD forecast of 1.35 [74 U.S. cents] now appears a long shot,” said Desjardins chief economist Jimmy Jean and foreign exchange strategist Mirza Shaheryar Baig in a recent report. 

Article content

Article content

“We have changed our forecasts and now expect the loonie to remain soft in the next two quarters before gradually strengthening towards the end of next year.”

Article content

Article content

After hitting 74 U.S. cents in June, the Canadian dollar has been on a downward track not just against the U.S. dollar, but other major currencies as well.

Article content

“This wasn’t just a U.S. dollar story,” said the strategists. Canada’s currency has sunk 6 per cent against the Mexican peso, 5 per cent against the euro and 3 per cent to the renminbi.

Article content

The Bank of Canada’s CEER Index, a weighted average of bilateral exchange rates for the Canadian dollar against the currencies of major trading partners, is near a nine-year low, they said.

Article content

Desjardins suspects two key drivers are clipping the loonie’s wings. Pension fund hedging flows have abated and the Canadian economy is lagging the United States.

Article content

Canada’s economy didn’t grow in the first half of the year, and Desjardins expects growth in the third quarter at less than 1 per cent. Businesses remain cautious under the threat of U.S. tariffs and households are under strain as mortgages renew at higher rates. The rapid deceleration in population growth has also weighed.

Article content

Article content

While fiscal stimulus is expected in the upcoming federal budget, its benefits won’t show up until well into 2026, said the strategists.

Article content

Article content

Down south it’s a very different picture. Sturdy consumer demand and business investment drove growth higher in the first half of the year, especially in high-tech sectors, and economists are now “significantly” upgrading their forecasts. The Federal Reserve Bank of Atlanta’s GDPNow currently puts growth for the third quarter at 3.9 per cent.

Article content

There are risks to the U.S. outlook. Trade tensions with China could escalate, the government shutdown could drag on to the point that it damages the economy and high-flying tech stocks could suffer a correction.

Article content

“The U.S. dollar has stabilized for now but remains vulnerable should any of these risks materialize,” said the strategists.

Article content

However, another of the loonie’s driver, pension fund hedging, has taken a back seat since the summer. Desjardins said Canadian pension funds significantly raised their forex hedge ratios in the second quarter, boosting the Canadian dollar, but now they appear to be sitting on the sidelines.