Loonie to fall to 93 cents US, BMO predicts

The Bank of Montreal predicts the loonie will fall to 93 cents US over the next three months amid slowing global growth and as commodity prices continue to decline.
An employee serves a customer at a currency exchange outlet in Calgary. BMO predicts the loonie won't return to parity until the end of 2012. (CBC)

The Bank of Montreal on Wednesday predicted the loonie will fall to 93 cents US over the next three months amid slowing global growth and as commodity prices continue to decline.

The Canadian dollar, regarded by currency traders as closely tied to commmodities, closed at 96.84 cents US, down 1.16 cents.

The bank also lowered its forecast for Canadian and world economic growth and extended its estimate of how long the Bank of Canada will take to begin raising interest rates.

It did not rule out the possibility the central bank would lower its trendsetting rate at its next meeting on Oct. 25.

The change in its forecast was based primarily on increased market nervousness over Europe’s debt crisis, which it expected would "weigh heavily on the global economic landscape."

With the crisis causing business and consumer borrowing to lag and as evidence grows that the U.S. economy continues to weaken, the bank now predicts Canadian growth of to 2.2 per cent this year and 1.8 per cent in 2012.

At the beginning of this year, its outlook was for 2.7 per cent in 2011 and 2.6 per cent in 2012.

BMO also cut back its global growth forecast to 3.6 per cent this year and 3.5 per cent in 2012. Its earlier forecast had pegged world growth at 3.9 per cent growth this year and 4.5 per cent the next.

BMO's loonie forecast (quarterly averages):
2011 Q4 96.2 cents US
2012 Q1 93.0 cents US
2012 Q2 93.0 cents US
2012 Q3  95.2 cents US 
2012 Q4 99.0 cents US

It predicted the Bank of Canada would hold off raising interest rates until January 2013.

The forecast for the Canadian dollar reflects falling prices for commodities.

Copper has fallen 21.8 per cent over the last month and is down nearly 30 per cent from its record high in February.

North American oil benchmark prices have dropped too, recently trading under $80 US for only the second time in the past year.

BMO predicted Europe’s debt crisis to linger well into 2012, "if not longer."

Even if European leaders do move decisively to avoid having the crisis infect larger economies such as Italy and Spain, and European banks remain unscathed, global growth isn’t likely to rebound quickly, it said, and that should weigh on commodity prices and the loonie.

"Indeed," the bank said, "European economies are likely to be hamstrung by austerity measures and restructuring for at least the next few years."

Given that, it estimated the loonie would trade at about 95 cents US until the second half of next year, with the currency returning to parity by the end of 2012.