The Canadian dollar may weaken to a five-year low as slow economic growth and rising U.S. interest rates spark a retreat from the country’s corporate debt similar to that seen in government bonds, according to UBS AG.
“If the Federal Reserve raises rates, then money will go back into the U.S.,” Geoffrey Yu, a senior currency strategist at UBS in London, said in a telephone interview. “That’s bad for the Canadian dollar.”
The currency could weaken more than five cents to C$1.15 per U.S. dollar over the next year as stronger U.S. growth prompts the Fed to increase record-low borrowing costs, Yu said. With higher interest rates available in the U.S., the relative yield advantage of Canadian corporate debt will disappear, eliminating a capital flow that’s supported the currency amid an exodus from the country’s government debt, he said.
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