Canadian dollar ends 2013 with higher close but return to parity likely far off

TORONTO - The Canadian dollar closed higher Tuesday at the end of a year in which the loonie fell below parity with the U.S. dollar, with little expectation it will regain that level any time soon.

The loonie rose 0.04 of a cent to 94.02 cents U.S. for a loss of 6.4 per cent during 2013.

The currency started the year at 100.51 cents U.S. but by early February the dollar had slipped below parity and closed as low as 93.42 cents on Dec. 27, its lowest close since early August 2010.

Part of the reason for the slide was increasing strength in the U.S. dollar on rising speculation starting in late May that the U.S. Federal Reserve would start to taper its US$85 billion of monthly bond purchases, a key stimulus measure that has kept long term rates low and supported a strong equity market rally.

The U.S. central bank decided in December to reduce purchases by $10 billion a month starting in January and said further tapering would depend on future economic data.

Declining commodity prices also helped depress the loonie, but the biggest pressure point for the dollar was made in Canada.

"Most importantly, the view on the Bank of Canada changed, as we came into this year expecting the BoC to hike rates at some point," observed said David Watt, chief economist at HSBC Bank of Canada.

"Instead, the Bank of Canada stepped back from its tightening bias and removed its tightening bias and now the discussion is actually whether the Bank of Canada might cut rates."

Watt added that he expects the Canadian dollar will continue to move lower during 2014.

"We were expecting the Canadian dollar to linger around 90 cents actually from the middle of next year into 2015. So we’re expecting the Canadian dollar to remain quite a bit below parity," he said.

Watt said another issue for the dollar is that the Canadian economy is "consistently underperforming."

"Even though you may get the odd quarter that looks pretty good, the underlying story for the Canadian economy is still one where we have to essentially go through a difficult transition as we move away from consumers toward exports and business investment," he said.

"We are not seeing those trends unfold smoothly at the present time, especially on the exports side."

The Canadian dollar also weakened during the year against the euro and the British pound while rising against the Australian dollar and the Japanese yen.

Meanwhile, traders on Monday digested data showing U.S. home prices increased at a slower rate in October.

The Standard & Poor’s/Case-Shiller 20-city home price index rose 0.2 per cent from September to October, down from a 0.7 per cent increase from August to September as higher mortgage rates weighed on sales and dampened the housing recovery.

For the year, U.S. housing prices still reflect big gains in earlier months. They have risen 13.6 per cent over the past 12 months, the fastest since February 2006, before the U.S. real estate crash.

Other data showed the Chicago Purchasing Managers Index, a key reading on manufacturing in the U.S. Midwest, slowed during this month, falling to 59.1 from 63.

Also, the U.S. Conference Board said its consumer confidence index for December came in 78.1, up sharply from 72 in November.

Commodity prices Monday were mixed as the February crude oil contract on the New York Mercantile Exchange declined 87 cents to US$98.42 a barrel.

The February gold contract on the Nymex shed early losses to move up $1.50 to US$1,202.30 an ounce. The March copper contract was up a penny at US$3.40 a pound.