The Canadian dollar is trading against the US dollar at levels not seen since 2020 as the combined pressures of economic outlooks, elections, and energy prices weigh. And up or down, the level of the loonie is a constant in the travel industry, often influencing where – and if – clients choose to travel.
Here’s what you need to know:
What’s happening with the Canadian dollar?
Canada’s currency sunk just below 72 cents US on Monday for the first time in more than four years, breaking through the 72- to 76-cent band it has been trading within in recent months.
The loonie fell further on Tuesday, and continued to inch down on Wednesday, closing at 71.86 cents US.
The lower loonie should help industries like tourism because it can encourage more Americans to travel north to get more bang for their buck, but for anyone travelling to the US, or destinations where the US buck is readily used (like the Caribbean), it means paying more.
What’s driving down the currency?
The biggest driver of the split between the Canadian and US dollar is the diverging economic outlooks, and the interest rate decisions linked to those. That’s because the higher the central bank interest rate, the more worthwhile it is to hold that country’s currency.
Canadian economic growth is looking weaker than the US, leading the Bank of Canada to cut its key interest rate by an unusually high half a percentage point to 3.75% last week. It was the fourth consecutive cut by the central bank and economists expect continued cuts ahead. With the US economy seeing stronger growth, there’s less pressure and expectations of the path to lower rates from the US Federal Reserve.
“The US economy feels a lot more resilient. So, the assumption is that they’re not pressured, the Fed isn’t pressured to reduce rates as much as it is in Canada,”
Crude prices have fallen recently, down below US$70 a barrel, to also weigh on the loonie.
“The outlook in the near term is definitely grim for the Canadian dollar,” said Rahim Madhavji, president at Knightsbridge Foreign Exchange Inc.
What’s the outlook?
Scotiabank strategist Hugo Ste-Marie said in a recent note that he’s been bearish for some time on the loonie. The director of portfolio and quantitative strategy says the Canadian dollar could re-test the lows of the past two decades, such as 2020 and 2016 when the loonie neared 68 cents US, if it pushes below the 72-cent threshold, which it now has. Ste-Marie said the expectation is the Canadian dollar will bounce back next year, but that the level that it’s expected to recover to keeps inching down as well.
“We continue to see more downside risk than upside risk going forward,” he said.
Much of the pressure from the diverging rate path with the U.S. has already been baked into the price, but there’s still a question of just how much the economies split, said Madhavji.
Who benefits from a lower loonie?
A lower Canadian dollar can boost industries like tourism, where the weaker dollar increases visitors from abroad, especially from the US, as their money goes further here. It can also mean bigger profits for Canadian businesses that export, like the oil and gas industry, forestry and manufacturing.
The lower loonie can also boost TSX company earnings. Ste-Marie said that, all else equal, a five per cent decline in the annual average of the Canadian dollar would push earnings up by about two per cent.
Where does it hurt?
A lower loonie means travelling abroad can be more expensive for Canadians, including those planning to travel south for the winter.
A lower loonie also means imports are more expensive, making the cost of living higher at home for those who might be debating whether to away.
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