The loonie is due a rebound

The Canadian dollar, or loonie, has slid to a five-year low against the US dollar. The ebbing commodities boom and the resulting economic slowdown across resource-rich Canada have reduced its appeal. But it may have fallen too far, David Rosenberg of Gluskin Sheff tells Canada’s National Post.

For a start, just about everyone is bearish on the loonie – and that typically spells opportunity. Secondly, the fundamentals are encouraging too, despite the slowing commodities sector. Canada has recorded trade surpluses (it has exported more than it imports) in six of the past eight months.

Manufacturing shipments have grown by 6% in the past year, a sign that the economy is rebalancing away from commodities – in fact, it’s been helped along in this by the recent weakness in its currency. Meanwhile, the strengthening US economy should boost demand for Canada’s goods – the US takes 75% of Canada’s exports.

All told, Canada’s GDP growth in the fourth quarter could eclipse America’s. That certainly isn’t priced in. Morgan Stanley, meanwhile, points out that Canada is among the few major economies with an inflation rate that is sitting at the high end of the central bank’s target range. This implies that interestrate rises in Canada could be closer than markets currently expect.

All else being equal, higher interest rates tend to boost demand for a currency (as investors are attracted by higher yields). Morgan Stanley suggests betting on the loonie to rise against the New Zealand dollar, which is exposed to a slowdown in Asia.

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