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Capital markets team publishes 2021 Canadian dollar outlook

By The IJ Staff | November 27 2020 12:55PM

Manulife Investment Management’s capital markets strategy team has published its outlook for the Canadian dollar (CAD) in 2021, saying the loonie is likely to reach US$0.77 in the short term and could trend as high as US$0.79 in the next six to 12 months.

“We continue to forecast an appreciation of the CAD relative to the US dollar (USD). We are near our earlier forecast of US$0.77 and believe the CAD can see further appreciation towards US$0.79 with risk to the upside over the next 12 months,” they write. “We believe investors should expect this trend of an appreciating loonie to continue as we forecast an overall weaker period for the US dollar, and stronger oil prices over the near-term.”

Monetary inflation policies

The strategy team, lead by Philip Petursson, chief investment strategist and head of capital markets research, says the dollar index has fallen as much as 10 per cent since March 2020, owing to the significant monetary inflation policies by the U.S. Federal Reserve. “The United States is not the only country to boost its money supply through fiscal or monetary policy. But the degree to which the U.S. has expanded the money supply overshadows the other major centres of Europe, Japan or Canada,” they explain. “If each country’s money supply expanded at the same pace then currencies would be less likely to fluctuate against each other. But when one country expands its monetary base faster than others, a devaluation should occur. In today’s case, the U.S. has expanded its money supply at a far greater pace than other countries. As such, we have seen the U.S. dollar depreciate.”

Crude oil likely to trend higher

Oil is a big part of the team’s call on the dollar, as well. Given that commodities are priced in USD, they say, as the value of the USD falls, commodity prices tend to increase. With the USD falling and economies opening up, causing oil demand to return, the team says they believe the price per barrel of crude oil is likely to trend higher “with our upper range being US$50/barrel over the next six to 12 months.”

Finally, they say the Canadian dollar remains much more sensitive to oil prices than to any other factors. “In short, broad U.S. dollar depreciation will lead to oil price gains and along with it, Canadian dollar appreciation against (the) USD,” they write. “With the loonie likely to reach US$0.77 in very short order as oil prices continue the trend higher, we believe we can see US$0.79 over the course of the next six to 12 months with risk to the upside.”

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