Loonie has more room to rebound

With the global economy recovering from the Covid-19 pandemic, a rebound in trade and commodity prices will continue to support the undervalued Canadian dollar, CIBC Asset Management’s chief investment officer says.

Listen to the full podcast on AdvisorToGo, powered by CIBC.

“Given the context that we see is a continued economic expansion, we would see the U.S. dollar decline versus certain cyclical currencies like the Canadian dollar,” said Luc de la Durantaye in a mid-July interview.

The Canadian dollar rose above US$0.83 in early June before falling to US$0.78 in mid-July. It has since rebounded to around US$0.80.

De la Durantaye said the loonie remains undervalued compared to the U.S. dollar, which he considers among the more overvalued currencies in part because of the large current account deficit.

“We would see the Canadian dollar stabilizing here and regaining the recent losses that it had,” he said, rising to roughly US$0.82 or US$0.83.

The euro, meanwhile, may weaken somewhat, de la Durantaye said. Last month, European Central Bank (ECB) President Christine Lagarde said the bank would maintain ultra-low interest rates until inflation “durably” reaches its 2% target.

“The ECB has just reviewed its inflation target and seemed to be adopting a bit more dovish sort of policy in order to achieve its inflation target that they have missed for over 10 years,” de la Durantaye said.

The previous strategy used an inflation target of “close to but below” 2%; the new approach uses a “symmetric” 2% target that allows stimulus to continue in difficult economic environments even if the eurozone overshoots its inflation target.

The policy change will put “downward pressure” on the euro, de la Durantaye said, leading to weakness for “at least” the next six months to a year.

On the other hand, emerging markets such as Mexico and Russia are already withdrawing stimulus and raising interest rates, while India and Indonesia may do so over the next year. The Russian ruble is supported by strong oil prices, de la Durantaye said, while the Mexican peso offers attractive rates.

“There are opportunities outside the developed world that are interesting,” he said.

This article is part of the AdvisorToGo program, powered by CIBC. It was written without input from the sponsor.

Mark Burgess

News

Mark was the managing editor of Advisor.ca from 2017 to 2024.