After trading in a fairly narrow band between 95 cents and $1.05 US for the past three years, the bank says it expects the loonie to lose some of its value next year, because of a number of factors.
Canada has had a current account deficit — the balance of payments between Canada and the rest of the world for all goods, services, investments, imports and exports — for the last five years.
Goldman says all else being equal, that should lead to any currency losing some of its value. But that hasn't happened with the loonie due to a variety of other factors that the bank says are about to end.
A strong banking sector was able to attract foreign investment, enough to offset a 30 per cent decline in manufacturing since the recession. But our much lauded financial sector isn't attracting as much foreign investment as it once did, Goldman notes.
Over the past few quarters, capital inflows have slowed rapidly, pushing the [balance of payments] into deficit of about one per cent of GDP currently," Goldman says.
The loonie was also seeing some time in the sun as a reserve currency, which means other foreign governments were stockpiling it, and increasing its value. That trend is also slowing, Goldman says.
Another thing working against the loonie is that instead of a rate hike next year (which would push the loonie higher) economists are now saying it's not impossible that we see a cut, as inflation remains low.
"Our baseline is for the [Bank of Canada] to be on hold, but since the money market curve is pricing a small chance of hikes through end-2014, we see risks here also skewed to the downside," Goldman Sachs said.
The bank also says the housing market is likely to drag the loonie lower. "With house prices already very elevated … it is likely that private consumption will no longer be the kind of positive impulse to the economy that it was in the past," the bank said.
"All told, there are a number of reasons why the Canadian dollar has scope to weaken," the report reads. "Combining all these factors, we see good reasons for gradual [loonie] weakness to persist for idiosyncratic reasons [and] a steady drift weaker and gradual underperformance relative to other major currencies, in particular the U.S. dollar."
Add it all up and the bank suggests the loonie could fall by as much as seven per cent. The loonie was trading hands at 94.38 cents US on Wednesday.
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