National Bank Financial is lowering its forecast for the Canadian dollar by 4¢. The firm says the loonie will end the year at US77¢, averaging US78¢ for the year.

“Despite a record U.S. trade deficit, the greenback is holding up,” NBF notes in a new report. “Over the first quarter it gained 1% on a trade-weighted basis.” Meanwhile, the Canadian dollar is losing its cyclical lift, NBF says. “It cannot maintain altitude against a retreat of commodity prices at a time of negative Canada-U.S. interest-rate spreads.”

“The Canadian dollar might well be subject to a domino effect from other cyclical currencies,” NBF says, noting that its correlation with other cyclical currencies such as the aussie and the kiwi is at an all-time high. So, “weakness in the New Zealand and Australian currencies could pull down the Canadian dollar,” it warns.

Of the three cyclical currencies, NBF says loonie has the least support from interest rates. “Even Canada’s long-rate spreads with the U.S. are negative, while those of Australia and New Zealand are well into positive territory. Canadian spreads this negative are usually accompanied by less positive Australian and New Zealand spreads.”

“Though the loonie is generally less sensitive than the other two cyclical currencies to commodity prices, the absence of a supporting rate spread could well mean that it will fall almost as much as them,” it says.

NBF now expects the Bank of Canada to wait until September to raise interest rates, instead of May, as it previously anticipated. “In response to the softness of net exports, which is now likely to last a while, the Bank is less likely to move with the Fed. So Canadian rates are likely to be flat for the next four or five months while the Fed keeps tightening – another minus for the loonie,” it says.

http://www.nbf.ca