Analysis: Canadian dollar set to drop further as economy struggles

Tue Mar 5, 2013 3:40pm EST
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By Julie Haviv and Alastair Sharp

NEW YORK/TORONTO (Reuters) - The Canadian dollar, which has been declining against the U.S. dollar so far this year, is expected to slip further in the near term as a slowing Canadian economy and cooling housing market keep the nation's interest rates near historic low levels.

Speculators turned bearish on the loonie last week, with data from the Commodity Futures Trading Commission showing investors going net short for the first time since a brief retreat in mid-2012.

"There's been a very significant souring of the mood on the Canadian dollar over the past few weeks," said Shaun Osborne, chief currency strategist at TD Securities in Toronto.

The Canadian dollar, known in currency markets as the loonie because of the loon species of bird that appears on the nation's $1 coins, has fallen 3.5 percent against the U.S. dollar in 2013, lately trading at C$1.0267, a move that contrasts starkly with the 20 percent gain achieved over the past 10 years.

The recent decline reflects Canada's dimming growth prospects. Data out Friday showed its economy grew by just 0.6 percent on an annualized basis in the fourth quarter, below the Bank of Canada's already reduced 1 percent forecast, and the economy actually shrank in December.

Growth has been hurt by a sharp slowdown in the country's once-hot housing market after the government last year imposed tougher mortgage rules to try to prevent a property bubble.

Deep discounts for Western Canadian oil, caused partly by a lack of pipeline capacity, have also hit growth. And the Canadian dollar's previous rise has hurt export-oriented manufacturers in Ontario and Quebec.

At the same time, the U.S. stock market's Dow Jones industrial average hit a new record on Tuesday and is up nearly 9 percent so far this year, which should be reflected in some increases in foreign capital flows into the U.S. dollar. By contrast, the Toronto Stock Exchange S&P/TSX composite index has risen only 2.8 percent in 2013.   Continued...

Canadian one hundred dollar bills are displayed in this posed photograph in Toronto, October 22, 2008. REUTERS/Mark Blinch