How Low Will the Loonie Go?

Length 2:26

Avery Shenfeld, Chief Economist, CIBC World Markets

"In the near term the Canadian Dollar seems quite range bound, but when we look at the longer term picture, we're concerned that we're going to need a weaker Canadian dollar in order to be successful in exports. That's because if you look at Canada's track record in terms of export volumes, we've been lagging seriously behind not just the Chinas of the world, but the U.S. as well, all the way back to 2005. Before that we were essentially keeping pace, and our diagnosis of the situation is that we've simply lost too much export capacity, and that we need to make Canada a cheaper place to do business. We'd like to have better productivity, we'd like to find other solutions, but it may be part of the solution is a cheaper Canadian Dollar. So we're looking down the road, could be a couple of years before we get there: a Canadian Dollar more in the 70 cent range.”

What can we expect from the C$?

“The Canadian Dollar has been holding ground quite nicely. But remember for most of this expansion, we weren't relying on exports. We were leaning on things like housing and consumer borrowing and spending to get to full employment. We're at a stage in the cycle where the Bank of Canada thinks we've done enough of that; where Canadian households are getting more reluctant to borrow to buy yet another condo or yet another car. In order to get growth back up to the levels that we need, we're going to need that cheaper Canadian Dollar. The Bank of Canada will likely play a role in getting us there by keeping Canadian interest rates low enough relative to those in the US that we see the Canadian dollar give some of that ground back over the next few years.”

Impact for investors

“Many investors have plans longer term to at least spend some of their retirement in the U.S. or in jurisdictions where the U.S. Dollar is the medium of exchange. And we find that many Canadians really don't have a lot of investments in U.S. Dollars to hedge against those future costs. So I think it behooves advisers to sit down with clients, look at their retirement plans, ask those questions and think about getting enough U.S. Dollar exposure, even through the bond market, the equity market - but through some vehicle where you're accumulating savings in U.S. Dollars to cover those future costs which will be in dollars.”