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Posthaste: Canadian dollar shines this summer as interest-rate differential war heats up Back to video

The sun is shining on the loonie in what has been an “unusual” summer for the currency so far.

The Canadian dollar rose 2.4 per cent last month against its United States counterpart, its third-best August in 31 years.

Past performance, of course, is no guarantee of future outcomes — as most ads for investment products will remind you — and many currency watchers aren’t holding out much hope that the loonie can maintain its momentum throughout the remainder of the year.

“This unusual performance reflects a weak (U.S. dollar) and speculative flows rather than strong Canadian fundamentals,” National Bank of Canada economists Stefane Marion and Kyle Dahms said in a note.

The greenback took a beating in August, with the U.S. dollar index posting its “worst performance in nine months,” falling 1.9 per cent, they said, as doubt set in about the strength of the American economy and the U.S. Federal Reserve pivoted towards cutting interest rates, giving the loonie a boost.

“Given the uncertainty surrounding the continuation of the economic expansion, we believe it would be unwise to view the recent depreciation of the (U.S. dollar) as the new normal,” the National Bank pair said.

So, what’s next for the Canadian dollar?

In the short term, Marion and Dahms think it could temporarily appreciate, given that there are fewer short positions than earlier in August. In the long term, however, they believe it faces too many economic headwinds to thrive in a battle with the U.S. dollar.

For example, it appears that Canadian gross domestic product is slowing, based on data released last week by Statistics Canada. Furthermore, the labour market is “deteriorating more rapidly in Canada than the U.S.,” they said.

They are forecasting the Canadian dollar to end the year near 71 US cents. It currently sits at around 74 US cents, according to Bloomberg.

Corpay Inc. currency expert Karl Schamotta is also taking a short-term, longer-term view of the Canadian dollar.

“The currency weakness baton has been passed to the greenback for now,” he said in a note Thursday, adding that the loonie could “grind a few cents higher in the coming months.”

There is also more upside in the loonie if U.S. jobs numbers seriously disappoint today, he said.

The Canadian dollar could also win the interest rate wars if the Fed ends up cutting by larger increments than the Bank of Canada‘s 25-basis-point steps.

“Rate differentials are tightening in the loonie’s favour,” Schamotta said in further comments.

But Canada’s productivity issues and debt troubles will weigh on the economy and the currency.

“An extreme selloff in U.S. markets or a rapid slowing in the global economy could trigger a sharp unwind at any time, knocking the exchange rate back to early-August levels in short order,” Schamotta said.

At the start of last month, the Canadian dollar was trading at 72 US cents.

Well-known Bay Street economist David Rosenberg is also downbeat about the loonie’s prospects.

“Rallies are to be rented as the fundamental trend will weaken over time,” the founder and president of Rosenberg Research said in a note on Wednesday following the Bank of Canada‘s interest rate cut.

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Labour productivity at Canadian businesses fell by 0.2 per cent during the second quarter of 2024, with 11 of the 16 main industries recording declines, Statistics Canada said on Thursday.

Productivity has now declined for two consecutive quarters, after a 0.3 per cent drop in the first quarter of this year. At an annual rate, productivity fell by 0.7 per cent. — Jordan Gowling, Financial Post

Read the full story here.

• Today’s data: Canada and the United States release jobs data for August.
• Earnings: BRP Inc.

• Canada’s biggest banks eye organic growth instead of U.S. acquisitions
• Clash over natural gas comes to Ontario’s electrical grid
• String of rate cuts not enough to ‘resuscitate’ housing market, experts say
• Read the full story here.
• Borrowers could soon see lowest 5-year fixed rates in more than 2 years

You can be forgiven if you missed the latest development in the ongoing saga of the new trust reporting rules, especially If you’ve been away over the summer. Fortunately, the news is good since it seems to provide permanent relief for many Canadians who have “bare trust” arrangements. Bare trusts can potentially be used for nefarious tax purposes, but they’re most often used for real estate ownership, to protect confidentiality and for probate planning. Read Jamie Golombek here

FP Answers

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McLister on mortgages

Want to learn more about mortgages? Mortgage strategist Robert McLister’s Financial Post column can help navigate the complex sector, from the latest trends to financing opportunities you won’t want to miss. real estate

Today’s Posthaste was written by Gigi Suhanic, with additional reporting from Financial Post staff, The Canadian Press and Bloomberg.

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