A New Flight Plan for the Loonie?

Canadian Loons
Winfried Wisniewski |The Image Bank | Getty Images
Canadian Loons

The Canadian dollar has been on a roll. Can the loonie still move higher, or is it about to fall to earth?

If you ask the experts at Barclays Capital, they'll tell you the Canadian dollar still has some upside potential - for now. In the near term, they expect the loonie to outperform other commodity currencies like the Australian and New Zealand dollars because those countries have more economic exposure to China, where economic growth could slow. Also, economic growth in Canada is picking up, and Barclays expects two interest rate hikes this year.

Eventually, though, Barclays expects Canada's sluggish productivity growth and troubling current account deficit to come into focus.

And already there are signs that the loonie's strength is hurting sales of some goods to the U.S.

"Over the long run, with productivity growth still questionable, the currency expensive, and interest rates effectively capped, we think CAD gains may reverse somewhat," wrote Aroop Chatterjee, a currency strategist with Barclays Capital.

"Therefore on longer-term horizons, there are probably better plays in the major currencies."

Other analysts are less sanguine.

This report on the Canadian dollar suggests that commodities represent a much smaller share of Canada's exports than most people believe, and many Canadian consumers and businesses believe the loonie is overvalued.

Meanwhile, The Economist's Big Mac Index also suggests that the Canadian dollar may be overvalued - by at least 12%.

Just...food for thought.

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