Loonie to drop below fair value

While the Bank of Canada focuses on rebalancing the economy, the Canadian dollar will continue to fall.

It may dip as low as US0.85, which is below its fair value of US0.88 or US0.89, says Luc de la Durantaye, first vice president of global asset allocation and currency management at CIBC Asset Management. He manages the Renaissance Optimal Inflation Opportunities Portfolio.

Still, your clients shouldn’t sell any time soon, he adds, since people “have to keep in mind that the [BoC’s] ultimate goal is to [support] the economy.” Only when Canada starts to grow will the dollar be able to rally against the U.S. dollar.

Read: Weak dollar may benefit Canada

In the short term, de la Durantaye says to simply help people monitor the loonie’s performance. If the dollar rebounds significantly before the economy improves, investors could consider whether they’ll benefit from selling.

Read: Weaker loonie hurts more than it helps

Switching gears

Until recently, talk of economic rebalancing has primarily been associated with China.

But Governor Stephen Poloz and other central bank officials are becoming increasingly worried about real estate investment in Canada.

Read: Real estate won’t boost economy

That’s because many of the property investments made since the recession haven’t been very productive for the economy, according to de la Durantaye, who says economic growth has been “sluggish and there’s a need to rebalance the economy because…consumers have high levels of debt relative to [their] incomes.”

To offset that drag, the BoC wants to boost export activity and business investment, rather than depending on the consumer sector, he adds. And one way to foster that is to “have a weaker Canadian dollar.”

Read: BoC considers loonie-exchange rigging

“We know the economy has a current account deficit,” for example, and that’s largely due to low trade volume, says de la Durantaye. If the loonie is undervalued, “our exporters may become more competitive” on a global scale.

Read:

Canadian manufacturing positioned for growth

Snowbirds unfazed by weak loonie

Prepare for currency swings

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