One major reason why the Loonie is losing flying altitude versus the U.S. dollar is because of the spread between Canadian and U.S. interest rates.
The chart above shows this spread relationship for 10-year government bonds for both countries. As of this minute, US 10-year bonds are paying 2.89% whereas the Canadian 10-year bonds are only paying 2.58%. Well, who the heck internationally is going to want to buy the lower-yielding Canadian bonds (and in the process covert their local currency into Canadian dollars in order to pay for them)? Some foreign investors might have for reasons that are not immediately evident to us. However, most would seek the higher yield offered by the U.S. bonds.
Also, a bit of a vicious circle ensues as investors witness the erosion of the value of the Loonie in addition to the lower yield offered on Loonie-demoninated investments.
In our 2014 outlook, published at the beginning of this year, we forecasted the Loonie to trade in a range of 87 to 93 cents while it was still trading at 94 cents. It is now in the 91-cent range. So far, so good … for our forecast that is, not the Loonie itself.
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