Canadian dollar surged 2.4% in August, but experts warn economic headwinds could reverse gains
The Canadian dollar experienced an unusual summer surge, rising 2.4 percent against the US dollar in August, making it the loonie’s third-best August performance in 31 years, according to Financial Post.
However, economists caution that this strong performance may not last.
National Bank of Canada economists Stefane Marion and Kyle Dahms attributed the loonie’s gains to a weakening US dollar and speculative market flows, rather than robust Canadian economic fundamentals.
They noted that the US dollar index fell 1.9 percent in August, its worst performance in nine months, amid concerns over the strength of the US economy and the US Federal Reserve’s shift towards cutting interest rates, which boosted the loonie.
“Given the uncertainty surrounding the continuation of the economic expansion, we believe it would be unwise to view the recent depreciation of the (US dollar) as the new normal,” Marion and Dahms said.
In the short term, the economists expect the Canadian dollar to appreciate slightly due to reduced short positions in the market.
However, they predict that long-term headwinds, including slowing Canadian gross domestic product (GDP) and a rapidly deteriorating labour market, will prevent the loonie from maintaining its momentum.
They forecast the loonie to end the year near 71 US cents, down from its current value of around 74 US cents.
Currency expert Karl Schamotta from Corpay Inc. echoed this sentiment, predicting that the loonie could “grind a few cents higher” in the coming months. He added that the loonie might benefit further if US labour data falls short of expectations.
Schamotta also pointed out that if the US Federal Reserve cuts interest rates by larger increments than the Bank of Canada, the loonie could gain an advantage. However, he warned that Canada’s productivity challenges and debt issues would weigh on the economy and the currency in the long run.
An extreme selloff in US markets or a rapid slowdown in the global economy could trigger a sharp drop in the loonie, bringing it back to early-August levels, Schamotta said.
David Rosenberg, founder of Rosenberg Research, also remains pessimistic about the loonie’s future, suggesting that recent gains are a temporary trend reversal rather than the start of sustained growth. He emphasized that rallies should be “rented” rather than relied upon for long-term strength.
As of early August, the Canadian dollar was trading at 72 US cents. While its recent performance has impressed, experts warn that the loonie’s strength may be short-lived amid growing economic challenges.
