Volatility aside, dollar to stay at 80 cents by year-end: RBC

The Canadian dollar will go through some wild swings in 2009 before ending the year where it started — at 80 cents US, according to a report by RBC Economics released Tuesday.

Craig Wright, RBC's chief economist, said a conspiracy of lower global economic growth, soaring government deficits and essentially zero per cent interest rates will be enough to have investors running back to the U.S. dollar during 2009.

That means the Canadian currency could fall as low as 76 cents during the year before recovering to the 80-cent level by 2010.

"Over the near term, it's going to be anything but stable," Wright said in an interview from Calgary prior to speaking with a business audience.

Canada's problem is that worldwide investors still see the U.S. greenback as the safest currency bet among any of the global currencies in these difficult economic times, he said.

Thus, it is not important that Canada's deficit, in relative terms, is lower than the budgetary shortfalls in many other countries or that the Canadian economy will likely outgrow the United States in 2009.

"It's a bit odd. But [the U.S. dollar] is still a safe haven for investors," Wright said.

Right now, RBC Economics is estimating that Canada's GDP will contract by 1.4 per cent, slightly more optimistic than the Conference Board of Canada's prediction of a 1.7 per cent shrinkage.

Still, that performance gives Canada an edge compared to the United States, which RBC expects to endure a deeper contraction — 2.4 per cent — in 2009.

2010 recovery

Most forecasters believe that economic growth will reappear in Canada and the United States in 2010, providing some lift underneath the Canadian currency.

Wright now predicts that the loonie will rise to 87 cents by the end of 2010.

RBC's currency prognostication differs somewhat compared to other economy watchers.

BMO Economics, for example, sees the Canadian dollar worth slightly more than 78 cents in 2009 and jumping more than a dime to close 2010 at a shade below 90 cents.

Interestingly, interest rate differentials will drive neither the volatility of the Canadian dollar in 2009 nor its rising value in 2010. That is because interest rates in most countries are already close to zero.

In Canada, the overnight lending rate set by the Bank of Canada currently stands at 0.50 per cent and the fed funds rate of the U.S. Federal Reserve Board and the European Central bank's deposit facility rate both stand at 0.25 per cent.

In past years, investors would buy Canadian dollars partially if the Bank of Canada had set its interest rates higher than those in the United States.

With most central banks setting rates at extremely low levels, however, investors are not likely to buy and sell currencies based upon differences in national interest rates, Wright said.

"Rates aren't driving the currency anymore," he said.