The struggling loonie likely has further to fall, and that’s good for the economy, says TD Economics in a new report.
TD notes that the recent drop in the Canadian dollar to 90 cents U.S. territory represents the continuation of a trend that began last year, when it fell from parity to about 94 cents U.S. The currency’s tumble has accelerated this year, to its lowest level in four years, it adds.
And, TD says that it likely has further to go, given that Canada’s economy is expected to underperform the U.S., interest rate hikes are not anticipated anytime soon, and the outlook for commodity prices is weak. As a result, it expects that the loonie will slide to about 85 cents U.S. by mid-year, which it notes, is a good thing, on balance.
“A weaker Canadian dollar does create winners and losers. Broadly speaking it benefits exporters, but reduces Canada’s purchasing power abroad and will likely lead to higher inflation. However, given Canada’s current reality, where stronger export growth is the missing piece in Canada’s economic growth and inflation is at a very low level, it is an economic boon,” it concludes.
TD also expects the trend to reverse as inflation picks up in Canada, and interest rate hikes become more likely. It sees the loonie as “likely to return to around the 90 cents level by the middle of 2015.”