Forecasts for the loonie and U.S. dollar

In addition to upsetting global markets and helping push oil prices negative, the pandemic has affected currency markets.

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The economic shock from Covid-19 drove the U.S. dollar higher in March, said Luc de la Durantaye chief investment strategist and CIO at CIBC Asset Management.

The increase didn’t last, however, and he expects the dollar to stabilize or decrease in value in the longer term.

The increase in March reflected a shortage of U.S. dollars as global economic activity dropped, followed by commodity prices, de la Durantaye said in an April 9 interview.

Commodity producers received fewer dollars for their goods, and foreign companies borrowed in dollars in response to decreased revenues.

The result was “a rise in the U.S. dollar against every currency around the world,” he said — including the oil-sensitive loonie.

The increase was curtailed as the Federal Reserve enacted a bounty of measures to flood the market with liquidity, including expanding swap facilities for U.S.-dollar funding to other central banks.

“That has stemmed the rise of the dollar and started to reverse it,” de la Durantaye said.

In the longer term, he expects a stabilizing or declining dollar — an outlook that assumes the pandemic begins to ease in late May or June.

At that time, “you can kick-start the global economic recovery,” he said. “That would mean a weakening U.S. dollar from there.”

If the pandemic persists or a second wave breaks out in the fall, de la Durantaye said his economic outlook would be more bearish, with the potential for another spike in the U.S dollar.

Tough luck for the Canuck buck?

The loonie’s outlook is more complicated because of the oil sector’s impact on the economy. Earlier this week, the benchmark price for the commodity sunk to less than −US$37.

Recovery will be challenged despite global production cuts, because demand has plummeted. A TD Economics report said an imbalance of at least 10 million barrels per day is expected over the second quarter.

Further, Canada is at a disadvantage in the sector because it has high-cost producers relative to regions like the Middle East and Russia, de la Durantaye said.

A report from Richardson GMP published on Monday noted other strikes against the loonie, such as the Canadian economy’s reliance on global trade and real estate.

“If the real estate bubble finally bursts, the [Canadian dollar] will move lower,” the report said.

What’s more likely, however, is that in six months, after social distancing is over, “oil will be higher, real estate more stable and potentially the recession may be shifting toward a recovery,” the report said. “That will be good for the CAD and bad for the USD.”

De la Durantaye said oil prices could stabilize at $20 per barrel, persisting into the fall. As such, “we don’t see a strong recovery in the Canadian dollar.”

Relative to the dollar, the loonie could peak at $1.39, he said. And it could revisit lows of $1.45 or $1.46 if the pandemic lasts beyond early June.

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