Loonie to fly even higher, economists believe

(September 24, 2004) The Canadian dollar, which hit an eight-month high this week, could reach 80 cents US by year’s end, some economists believe. The loonie rallied 1.4 cents US this week, reaching a peak of 78.5 cents US before settling back slightly Friday at noon to around 78.4 cents.

“We expect the Canadian dollar to reach approximately 80 cents US by the end of the year,” says RBC economist Jack Homareau.

CIBC World Markets economist Benjamin Tal agrees, stating he would not be surprised if the loonie attains the 80-cent level by late 2004.

“With interest rates on both sides of the borders rising roughly at the same speed and the U.S. economy being more vulnerable to the impact of higher oil prices, the Canadian dollar should do relatively okay in the coming three to six months,” says Tal.

BMO Nesbitt Burns senior economist Sherry Cooper also expects the loonie to soar. “The growth gap between the U.S. and Canada has vanished, oil prices remain lofty, and the U.S. current account deficit continues to deepen, all bullish for the loonie versus the greenback,” she says. “Some notable technical analysts have suggested that the Canadian dollar is about to break above a 30-year trend line.”

Scotiabank is less optimistic in its short-term outlook, forecasting that the Canadian dollar will end the year around the 76-cent level, but could rise to as much as 82 cents by mid-2005.

Whichever way the loonie goes, Homareau notes that any appreciation or depreciation will produce economic winners and losers. “A stronger Canadian dollar benefits consumers in terms of lower prices for imported goods ranging from food items to new cars,” he notes. Businesses can also benefit by acquiring U.S. machinery and equipment at cheaper prices. On the other hand, he says, the most obvious losers are Canadian firms that export goods to the U.S.

Filed by Doug Watt, Advisor.ca, doug.watt@advisor.rogers.com