Scotiabank forecasts Canadian dollar below 80 cents until end of 2017

Get used to the cheap Canadian dollar because it's going to be around for a while, one of Canada's major banks predicted Wednesday.
The Canadian dollar may not go above 80 cents US for the next two years, Scotiabank forecast Wednesday. (The Canadian Press)

Get used to the cheap Canadian dollar because it's going to be around for a while, one of Canada's major banks predicted Wednesday.

In its monthly currency forecast, the Bank of Nova Scotia said it thinks the loonie will bottom out at around 73 cents US by the end of this year, before dipping even lower in 2016. 

There are good economic reasons to think that's possible. The value of Canada's currency has been closely linked to the price of a barrel of oil, and there's little to suggest oil prices are going to get anywhere near the levels they were at through much of 2014 any time soon.

Based on the price of future contracts, energy investors think there's little chance of a rebound in the near term — every single contract between now and November 2016 is priced at less than $54 US per barrel.

Against that backdrop, it's hard to imagine a sustained rally for the loonie.

Interest rate spread a factor

There are monetary reasons to expect a weaker loonie too. The U.S. Federal Reserve is expected to raise interest rates soon, possibly as soon as next month. Generally speaking, that drives a currency higher, as it makes it a more attractive investment for investors looking for higher returns.

The Bank of Canada, meanwhile, is showing no signs of raising rates. "While the Fed is edging closer to tighter policy, the Bank of Canada's latest policy statement indicated an even longer than-previously-expected wait before the economy returns to full capacity," Scotiabank said.

That means "interest rate differentials will move against the Canadian dollar as U.S. interest rates rise," the bank added. "Under these circumstances, policymakers will likely prefer to see the [the loonie] stay relatively soft."

Looking ahead through the end of 2017, the bank doesn't expect the Canadian dollar to ever eclipse 80 cents US.

The loonie lost more than half a cent to change hands at 76.03 cents US at the close on Wednesday.

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