The fall in the loonie’s value has been precipitous and largely unexpected. After trading in parity with the U.S. dollar from 2010 to 2013, the loonie has been in a gradual free fall since 2014, hitting a low in January when it cost CAD$1.45 to buy US$1.
Who’s affected? Can the loonie reverse its slide?
A pervasive impact
According to Justin Trudeau, the falling loonie has “a negative impact on parts of our economy, on broad swathes of our economy in many cases.”
The collapse has hurt a variety of companies, especially importers that need to buy foreign goods. For example, Air Canada (TSX:AC)(TSX:AC.B), which needs to buy parts and planes in U.S. dollars, reported $105 million in additional operating expenses last quarter resulting from a weak Canadian currency.
There are even fears that food retailers such as Loblaw Companies Limited (TSX:L), Empire Company Limited (TSX:EMP.A), and Metro, Inc. (TSX:MRU) could get hurt.
At the minimum, the falling loonie has impacted everyday consumers buying any item that wasn’t produced completely in Canada.
Can things still get worse?
Forecasts for 2016 are fairly dire. David Doyle, an analyst at Macquarie Capital Markets, expects the loonie to reach 59 cents versus the U.S. dollar by the end of 2016. “Once [the loonie] reaches this level,” he said, “it should remain subdued through 2018 and potentially even longer.”
James Price, a portfolio manager at Richardson GMP Asset Management, recently told Bloomberg that he sees the loonie hitting 65 cents per U.S. dollar. According to JP Morgan, “the beaten-down Canadian dollar has to fall even further to support real economic activity.”
The all-time low for the loonie was set in 2002 at 62 cents.
A reason to believe the analysts are wrong
Despite the doom and gloom, fixing Canada’s currency situation is quite easy. Because a huge portion of the economy is linked to energy, the collapse in commodities is the primary driver behind a weak loonie. Historically, the Canadian dollar has almost always weakened when oil prices fell. When prices rebound, it starts to strengthen.
If higher oil prices will cure a weak currency, you may not need to wait that long.
Kuwait, a major OPEC exporter, expects the price of crude oil to rise to $50 per barrel by the end of 2016. By 2017, the EIA expects the supply glut to be completely erased. The last time that happened, oil was above $100 a barrel. While reaching that price level may still take years, it’s tough to argue that oil won’t rebound over the long term, especially as the market rebalances.
Importers that are feeling currency pains today, like Air Canada and Metro, Inc., will likely be the winners of tomorrow.
