‘Worst is over’ for the Canadian dollar, says Desjardins #CanadaFinance

The Canadian dollar is expected to hold its ground against the greenback for the next three months, according to economists at Desjardins who are predicting “the worst is over for the loonie.”

Canada’s currency (CADUSD=X) fell to its lowest level against the U.S. dollar since 2003 last month, as U.S. President Donald Trump slapped punishing tariffs on Canadian goods. While the Canadian dollar has regained ground since then, it’s currently down about six per cent since late September.

However, Desjardins economists say the loonie’s recent thrashing may be over. Chief economist Jimmy Jean and foreign exchange strategist Mirza Shaheryar Baig on Thursday updated their forecast for the currency pair, calling for USD-CAD to hold between $1.41 and $1.45 over the next three months.

“We are no longer forecasting USD-CAD to rise to $1.48 this year,” they wrote in a research note on Thursday. “The worst is over for the loonie.”

The economists point to rising risk of a U.S. recession, the “relative cheapness” of the loonie helping Canadian exporters, and the U.S. dollar’s diminishing role as a safe-haven currency and hedge against volatile markets.

“When stocks fell in July and August last year, and in February and March of this year, the dollar fell too. Context matters,” Jean and Baig wrote. “With a made-in-America recession lurking, the U.S. dollar is unlikely to hedge risky assets like it did in the past.”

That said, Desjardins notes the loonie could fall further if U.S. tariffs prove “more durable and punitive,” or if its U.S. recession forecast is off.

“The post-pandemic recovery in the U.S. has proven incredibly resilient. Weakness in survey data has not translated to hard data yet. In short, the U.S. economy could defy predictions of recession yet again.”

“This prospect looks less likely in Canada, given its high trade exposure and the weakening of previous tailwinds like population growth,” the economists added.

“While we forecast a recession in Canada as well, the Bank of Canada front-loaded its cutting cycle and is likely to proceed more cautiously from here.”

Last week, CIBC Capital Markets issued a list of TSX stocks it sees benefiting from recent Canada-U.S. currency moves.

Jeff Lagerquist is a senior reporter at Yahoo Finance Canada. Follow him on Twitter @jefflagerquist.

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