01/03/2020 14:39 EST

Canadian Dollar Won 2019, And Some Say It Has Much More Room To Run

Canada's relatively high interest rates and rising commodity prices are making the loonie attractive. But the Bank of Canada might not like that.

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MONTREAL ― The loonie had the best year of any major currency in the world in 2019, sparking some optimistic predictions about where the Canadian dollar is headed next.

Among the optimists is London-based Capital Economics, which is predicting the loonie will hit 82 cents U.S. sometime in 2021, thanks to a resurgence in oil prices and a weakening U.S. dollar.

But before that, it predicts the loonie will likely give back some of its recent gains, because of weakness in Canada’s economy at the end of 2019.

Watch: All the ways Canadians and Americans are now totally different from each other, financially. Story continues below.


Canada’s job market shed a surprisingly large number of jobs at the end of 2019, while exports and retail sales also disappointed.

“Our estimates suggest that the consensus is still overestimating (economics) growth in the fourth quarter, which we think was close to zero,” Capital Economics’ senior Canada economist, Stephen Brown, wrote in a client note Friday.

That will drag the loonie down to around 75 cents U.S., Brown predicted, before it continues its ascent. 

The Canadian dollar had a stellar run right at the very end of 2019, breaking through the 77-cent mark on December 31, the first time it hit that level since October 2018. It was hovering around the 77-cent mark in mid-day trading on Friday.

The loonie grew modestly against the U.S. dollar in 2019, up just short of 5 per cent, but that was enough to make it the strongest major currency over the course of the year. According to data crunched by the Globe and Mail, only a handful of smaller currencies ― including the Thai baht and the Russian ruble ― appreciated against the loonie last year.

Bank of Canada would fight a strong loonie

But Capital Economics’ prediction this rally will continue is hardly the consensus view. For one thing, the Bank of Canada wouldn’t be happy about it, as it would make life more difficult for Canadian exporters.

“The key risk is the BoC itself, which tends to talk more dovishly whenever (the Canadian dollar) shows material strength,” said Shahab Jalinoos, head of foreign exchange strategy at global banking giant Credit Suisse, as quoted at Bloomberg News.

A stronger Canadian dollar would make it likelier the Bank of Canada would cut interest rates, in an effort to make the loonie less attractive to foreign investors.

The fact that Canada is one of the few developed countries not to have cut interest rates recently is one reason the loonie’s rally has some room to run, but only to around 78 cents U.S., Jalinoos predicts. 

In a report last month, economists at CIBC noted that the weakness in Canada’s economy is related to exports ― meaning a lower loonie would help at this point.

Their own forecast for the loonie, from mid-December,  sees the Bank of Canada lowering interest rates in the early months of this year, causing the loonie to drop to around 72.5 cents U.S. by the end of the year.

“Longer term, a weaker loonie will be a necessary ingredient to rebalance more growth towards exports and thereby reduce the reliance on rising household debt,” economists Avery Shenfeld and Taylor Rochwerg wrote.