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Financial planning tips

July 16, 2014

Is the Canadian dollar going to fall again?

Slow growth, persistent unemployment and a burgeoning recovery south of the border all point to a dollar worth less than US90¢ by year-end.

The Canadian dollar, which has dipped below US90¢ three times this year only to recover on each occasion, will end 2014 below that psychological barrier. This is according to Diana Petramala, an economist with TD Economics. In a report published Friday, Petramala pointed to continued weak economic growth and unemployment as factors driving the loonie’s projected fall.

“Going forward, we anticipate a bit more underperformance in the Canadian economy relative to the U.S.,” said Petramala in an interview with me on Monday. “Our unemployment rate has ticked back up to 7.1% and if you make an apples-to-apples comparison, Canada has unwound any outperformance it had relative to the U.S. over the last few years. Canada really did outperform coming out of the recession. But now Canada has slowed quite a bit and the U.S. is catching up.”

We have had our share of bad news this year. After a tough winter, gross domestic product growth is expected to come in at the half-year point below 2% (annualized). The employment picture is no better. After shedding 9,400 jobs in June, employment growth is basically flat in 2014.

“Over the first half of the year in total, the Canadian economy underperformed relative to expectations,” Petramala told me. “Part of it may be explained by weather, but you would have expected to have seen a bounce back in Q2.” We may even see gross domestic product growth slip below 2% by year-end, she said.

This all but ensures that the Bank of Canada will hold the overnight rate at 1% for the foreseeable future. Some argued for a rate hike earlier in the year, as housing numbers held firm and inflation gained a bit of momentum. Don’t count on that now, though.

“Even though inflation appears to be accelerating, the Bank of Canada is likely to see that as temporary rather than suggestive of broader inflationary pressures,” said Petramala. 

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