TD Canada Trust (TSX:TD) is forecasting further depreciation of the Canadian dollar this year – predicting that we will see the currency valued at 71 cents U.S. by year’s end.
The Canadian dollar got off to a strong start this year, rising 3.5% against the U.S. dollar in January and February after falling 8% in value in 2018. However, since the start of March, the Canadian dollar has fallen 1.3% against the U.S. dollar as prospects for the Canadian economy have dimmed.
The latest economic data showed that Gross Domestic Product (GDP) in Canada contracted 0.1% in January, following a deeper than anticipated slowdown in the second half of 2018. Strategists at TD Securities say that the Canadian economy has a "real problem on its hands," which will lead to broad weakness for the currency moving forward.
TD now forecasts that the Canadian dollar will spend the rest of this year in a range where it will cost between $1.35 and $1.40 Canadian to buy one U.S. dollar. Put another way, that means the Canadian dollar could fall to as low as 71 cents U.S. in the coming months. That's more than a 5% decline from its current level of 75 cents U.S.
"Prospects for Canadian dollar have shifted considerably to the downside over the medium-term. This comes in the wake of a poor fourth quarter GDP report, and the Bank of Canada returning to the drawing board on what it got wrong," said TD Securities in a note to clients.
"To put it bluntly, the Canadian dollar has established itself uniquely as a problem child in the G10. The positives are hard to find."
TD also stated that it thinks the Bank of Canada is now at the end of its tightening cycle after five interest rate hikes since mid-2017. If the central bank does move on interest rates this year, TD says it will more likely be a cut rather than an increase. The probability of an interest rate hike from the Bank of Canada is now at 0% for the next six months, according to trading in investments known as overnight index swaps.
