Canadian dollar could drop to 65 cents US in 2017, Macquarie forecasts

After a rough 2016, acurrency prognosticator at a major investment bank says he expects more pain for the Canadian dollar next year, predicting a low of around 65 cents US in the next 12 months.

David Doyle ofMacquarie Capital Markets Canada Ltd. says two major factors are going to conspire to drag the loonie almost 10 cents lower thanits current level of around 74 cents USover the next year: interest ratesand the price of oil.

The biggest factor in Doyle's analysis is the sudden divergence in monetary policy betweenCanada andthe United States. In the U.S., the Federal Reserve hiked its benchmark interestearlier this month and is signalling that it expects to do so again at least three more times next year.

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The Bank of Canada, meanwhile, is saying loudly and clearly that is had no intention of following suit. Economists are expecting the bank to stay on the sidelines through 2017 at least, and if any action comesit willlikely be to make rates lower not higher.

Divergence in monetary policies between the two closely tied countries is rare, so when it happens the impact tends to be large. Higher rates in the U.S.will drive up the value of the U.S. dollar versus everything. Couple that with lower rates in Canada, and you have a recipe for a cheaper loonie.

"The Bank of Canada, we think, is either going to be on hold or even cut rates,"Doyle said in an interview this week. "That divergence pushes the Canadian dollar lower and into that 65-cent level."

Another big factor that will be very familiar to Canadians is the impact of the price of oil. Currentlyoil is changing hands at around $52 US perbarrel. Doyle assumes the price of oil will increaseslightlyover the next 12 monthsto about $57 US perbarrel.

Normallythat would drive the loonie higher too, but in this case a modest increase like that won't be enough to offset the impact of interest rates.

"For now thehouseview is that the oil price is unlikely to go above $60," Doyle said. "If crudeoil were to move well above $60 then we'd have to update and revise to incorporate that into our loonie call."

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Indeed, there might be a blessing in disguise for Canada's long-suffering energy industry if a cheaper loonie happens even amid slightly higher oil prices.

That's because Canadian oil companies run their businesses in Canadian dollars, even as most of their revenues are priced in U.S. dollars. If crude oil manages to get as high as $60 US, these companiescould getas much as $85 to $90 Cdn perbarrel.

That's a vast improvement on the less than $15 perbarrel they were getting for their productas recently as February. So a cheap loonie coupled with slightly more expensive oil makes the upside for Canadian oil companies that much bigger.

"The fact that the currency can weaken even as oil moves up," Doyle says,"the real beneficiary of that is Alberta."

Trump impact

There's an X factorin all this, however. The election of Donald Trump could have benefits and drawbacks from Canada's perspective, and Doyle says it's hard to tell at this point which ones are more likely.

The president-elect's sabre-rattling on geopolitical events could send oil prices sharply higher, and that could move the loonie much higher, Doyle says. On the flip side, it's just as likely that Trump makes good on his vow to tear up NAFTA and possibly slap tariffs on Canadian goods. That would obviously send the loonie plummeting.

"There's a much wider range of outcomes," Doyle says.

"We looked at where the risks are versus where we see things headed," he says. And for the Canadian dollar right now, "the direction is likely lower."

• Other experts predict loonie will drop to at least 70 cents next year