Canadina Dollar Decade-Long Rally Ending, Davis Rea Says

The more than a decade-long rally in the Canadian dollar that was fueled by the boom in commodities is in danger of ending as demand for natural resources falters, according to investment management company Davis Rea Ltd.

The currency may tumble more than 30 percent to as low as 70 U.S. cents over the next decade as commodities enter an extended bear market, John Johnston, chief strategist at Toronto-based Davis Rea, wrote in a report. The currency, known as the loonie for the image of the water fowl on the C$1 coin, dropped today to an eight-month low of C$1.0309 per U.S. dollar, or 97 U.S. cents.

“This suggests strongly that the secular bull market in the Canadian dollar is also coming to an end, or maybe has even already ended,” wrote Johnston, a former Royal Bank of Canada deputy chief economist. “We believe that we are transitioning into a secular bear market in the Canadian dollar, and that we are now in an environment where any Canadian dollar strength is a selling opportunity.”

The loonie increased about 50 percent in the last decade as demand for commodities climbed as global growth accelerated and production from Alberta’s oil sands region surged, making crude oil the nation’s biggest export. The Standard & Poor’s GSCI Index of 24 commodities has more than doubled in 10 years.

Oil Sands

The price of Canadian crude produced from the oil sands remains depressed relative to the U.S. benchmark due to pipeline bottlenecks and as rising U.S. output from shale fields floods refineries. The differential for Western Canada Select to U.S. West Texas Intermediate is $25.50. The discount reached a record $42.50 a barrel on Dec. 14.

The currency has fallen 1.5 percent this year against the 10 developed-nation currencies tracked by the Bloomberg Correlation-Weighted Index. The U.S. dollar has gained 2.6 percent and the euro has risen 1.6 percent.

Davis Rea’s flagship bond and equity Balanced Pooled Fund has returned 8.22 percent since its inception in February 2005, compared with a 4.97 percent return over the same period by the benchmark the company uses to measure performance. The firm has C$600 million ($583 million) under management.

To contact the reporter on this story: Ari Altstedter in Toronto at aaltstedter@bloomberg.net

To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net

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