The lonely loonie

.

   By Guest Blogger Ryan Lewenza

.

It’s been a rough year for our dollar aka ‘the loonie’. As seen in the chart below, the CAD/USD has been trading in a range of roughly 72 to 75 cents for much of the year. Then, beginning in October, it started to nosedive, declining from 74.5 cents to a recent low of 69 cents, marking the lowest level in years.

All told, the Canadian dollar declined 8% this year and some are calling for it to drop even further in 2025. Sure, our dollar could drop a bit further in the short-term, but I think these dire calls for it to fall into the 50s is overblown, and in fact, I see our dollar surprising people in 2025. Call me a contrarian, but I’m predicting our Canadian dollar to recover next year. Here’s why:

Our dollar is down 8% this year vs the Greenback

Source: Stockcharts.com

First, there have been two key headwinds for our dollar – the divergence in interest rates and the prospect of Trump tariffs – which could ease up next year. An important driver of all currencies is the interest rate differential between different countries. This is captured in the chart below.

With our economy struggling compared to the US (our unemployment rate is 2% higher and our GDP growth has been lower) and inflation here in Canada running at a lower clip (Canadian inflation recently dipped below 2% yoy versus the US at 2.7% currently), the Bank of Canada (BoC) has been cutting interest rates at a more aggressive pace.

The BoC has cut rates five times since June with our overnight rate now at 3.25%. In contrast, the US Federal Reserve (Fed) has cut rates three times with the US overnight rate at 4.5%. So, with Canadian interest rates lower than in the US currently, our dollar has taken the brunt of this divergence with it declining to multi-year lows.

But this divergence in our economy and interest rates won’t continue indefinitely. The BoC said it was a ‘close call’ on the most recent 50 bps cut in December and is suggesting rate cuts will start to slow from here. Currently, economists and the markets are pricing in just a few more cuts in 2025. As the BoC moves to the sidelines on interest rate cuts next year, this should help our dollar to bottom and turn around.

Lower rates in Canada are driving our dollar lower

Source: Bloomberg, Turner Investments

On the tariff side, I personally believe Trump may lighten up on his threats of a 25% tariff across the board. Either he doesn’t follow through with a tariff on all goods or the tariff is put in place for a short period. We’ll have to wait to see what the big guy does, but just maybe it might not be as dire as it appears. If correct, this could provide a boost for our dollar.

Second, there’s big political change coming for Canada in 2025 that could be positive for our economy and dollar. I think it’s safe to say our current Prime Minister’s days are numbered. When your disapproval rating is approaching 70%, when you’re losing important by-elections in typical Liberal strongholds, and when 20-25% of your own caucus is calling for their leader to step down, it’s a safe bet that your days as leader are numbered.

The writing is on the wall for our PM and almost surely, he won’t be leading the Liberal party in the next election. Barring some major development (i.e., Mark Carney throwing in his hat), Canada is likely to have a new conservative leader in Ottawa in 2025, which I believe could be positive for the economy, markets and our dollar.

Finally, with the big drop in our dollar, it’s now trading at a key technical support level around 68-69 cents. Below is a chart of the Canadian dollar going back 20 years. You’ll note that the Canadian dollar is trading back at a key technical support level around 69 cents. This represented the lows in 2016 and during the pandemic in 2020. This is an important technical level so let’s see if it holds.

Long-term chart of the Canadian dollar

Source: Stockcharts.com

The last time we saw the Canadian dollar below this important 68-69 level was back during the early 2000s. During this time the Canadian dollar got down to 62 to 66 cents. In the very short-term, we could see our dollar fall a bit more but I don’t think we’ll hit that 62 cents low like we did during the 2000s. So, I think we’re getting closer to a bottom.

How we’re playing this at Turner Investments is that we’re planning to sell some of our US dollar investments and ETFs in the coming months. We have held a roughly 20% weight in US dollar investments the last few years. With the US/CAD dollar at multi-year highs, we’re planning to take advantage of this strength in the coming months by selling some of our US dollar ETFs and convert back to Canadian dollars. We’ll then invest these Canadian dollars in some hedged US and international investments.

With the low interest rates, political dysfunction in Ottawa, and Trump breathing down our necks, our dollar is feeling the brunt of it. But some of these headwinds will ultimately pass and our dollar should recover. Sure, it’s pretty bleak right now but better days lie ahead for our battered Loonie.

Ryan Lewenza, CFA, CMT is a Partner and Portfolio Manager with Turner Investments, and a Senior Investment Advisor, Private Client Group, of Raymond James Ltd.

.

About the picture: “Happy New Year, and thanks for all the tax, savings and financial advice over the years,” writes Nichole. “I’ve attached a photo of River, (an English Lab, but really part polar bear and part sloth) who this year started volunteering with PALS, the Pet Access League Society, in Calgary. Every other week she visits kids at the Children’s Hospital, bringing tail wags and a distraction from their challenges. PALS brings cheer with many visits to seniors homes, recovery facilities, hospitals, workplaces and schools all year round. If anyone needs to get their tax breaks in for 2024 (aka charitable donations) they can find out more info or even donate here:

.

To be in touch or send a picture of your beast, email to ‘[email protected]’.

Source: https://www.greaterfool.ca/2024/12/28/the-lonely-loonie/