If there’s one thing that the analysts of Wall Street and Bay Street can’t seem to figure out, it is how far the loonie will continue to slide against the greenback. The loonie has plunged nearly 25% since 2012, closing this week below US$0.75.
With some analysts calling for the end of the decline, and others calling for a continued decline south of US70 cents, it’s worth looking at what is driving the currency down and what industries might actually benefit from a weak loonie.
Crude helped push the loonie down
There are a number of reasons that support the theory that the dollar will continue to drop in 2016. First and foremost is the connection to the oil industry. Crude oil is biggest export of the country, and it has fallen in price by nearly 40% in just the past year and by even more when considering the past two to three years.
A drop in the price of crude lowers the revenue brought in by the oil and gas industry, lowering demand for the loonie and raising demand for the greenback. When oil prices started to rise this past spring, the dollar started to respond well and began to appreciate as well. With some analysts speculating that the price of oil could drop even further, possibly down to $30 per barrel, this could push the dollar down further to 70 cents or even lower.
Within the next few weeks the U.S. Federal Reserve will more than likely be raising interest rates. An increase in interest rates will appreciate the U.S. dollar against a basket of currencies, the loonie included.
Manufacturing and exports are about to enter a boom period … again
A lower loonie does make Canadian manufacturing more attractive to markets abroad and makes exports more affordable to consumers in the U.S. One such beneficiary in that scenario is Uni-Select Inc. (TSX: UNS), which is a manufacturer of automotive parts and paint products. While the loonie has dropped by 25% in the past year, the stock price of Uni-Select has risen by over 115%.
During the years when the dollar was at or near parity with the greenback, manufacturing was hit particularly hard because Canadian exports were no longer seen as competitively priced. With the country still teetering on a recession, more competitively priced manufacturing exports might be just what the economy needs to jump back into gear.
Analysts are clearly divided on whether the loonie will continue to drop or not. What is certain is that some areas of the economy benefit from a weak dollar and others do not, so investors would be wise to adjust their portfolios accordingly.
