While the Canadian dollar has weakened in recent weeks amid a dovish tone from the Bank of Canada and uncertainty south of the border, one economist says the central bank needs to push the dollar down even further to have a fighting chance against the U.S. government’s tough trade actions.     

“I’m really surprised at the extent of the trade actions that’s been taken against us by the U.S. government, and my sense is that the only way we can retaliate is for the Bank of Canada to sanction a weaker loonie to act as an antidote to the negative terms of trade shock that we are getting from our neighbour south of the border,” Gluskin Sheff + Associates Chief Economist David Rosenberg told BNN in an interview Friday, arguing a lower loonie will be beneficial to the Canadian economy.

Rosenberg says he wouldn’t be surprised if the loonie dropped as low was 74 cents U.S. by the end of the year and it could go even lower, he said.

“Hopefully it will just stop there, I wouldn’t be surprised if we go through 74 cents US.,” he said.

Other economists agree the loonie is expected to weaken further.  

“I only see it getting weaker with the [Bank of Canada] on hold and the Fed continuing to tighten, NAFTA uncertainties and cooling growth momentum,” Derek Holt, vice president and head of Capital Markets Economics at Scotiabank, told BNN via email. Holt said he sees the currency dropping to between 74 to77 cents U.S. in 2018.

The Bank of Canada kept its benchmark interest rate steady at 1.0 per cent in its latest rate decision last month, following two consecutive rate increases earlier in the year, with Governor Stephen Poloz indicating the bank will maintain that cautious approach going forward.

“The central bank now says the economy is more sensitive to interest rates and hence it will have to go slow on rate hikes going forward,” National Bank Financial Markets economists Stéfane Marion and Krishen Rangasamy wrote in a note to clients Friday.  “That’s a bit like saying it will keep feeding the beast it created after years of ultra-loose policy ─ overleveraging and housing taking a disproportionate share of the economy ─ for fear of being bitten.”

That dovish sentiment is what’s making Marion and Rangasamy believe the Bank of Canada will keep rates steady for the rest of the year. But stronger data may prompt the bank to raise rates again in 2018 and, as a result, the loonie will make a comeback.

Rosenberg, however, says the central bank is probably going to have “stay on the sidelines” well into the new year.  “We are going to need that stimulus especially [with] NAFTA negotiations – which are not going well,” he said.

The difference between Canadian and U.S. interest rates have become the main driver of the Canadian dollar instead of oil prices this year, says BMO Chief Economist Douglas Porter, as the recent rise in oil prices failed to prop up the supposed petrocurrency. The loonie was hovering around 78 cents U.S. when crude hit levels it hadn’t seen since January earlier in the week.

“Some of that is due to the fact that oil prices have been mostly range-bound, and some due to the fact that Canadian monetary policy has seen at least two sharp turns this year,” Porter told BNN.

While the dollar took a hit along with the latest GDP numbers earlier this week, it gained back some strength Friday after Statistics Canada figures showed the Canadian economy added 35,300 jobs for the month of October.

“With the domestic economic data losing some sparkle recently, and NAFTA concerns weighing, the currency has dipped to around 78 cents U.S. from the September high of 82.5 cents,” Porter said.  “While still up almost five per cent since the start of the year, we suspect that the currency will struggle to make much further headway, unless there is surprisingly better news on the NAFTA front.”

CIBC Deputy Chief Economist Benjamin Tal echoed that sentiment last week when he said the loonie is mispriced, and expects it to fall to 75 cents U.S. next year as the Bank of Canada maintains its dovish approach and NAFTA uncertainty lingers.  

Editor's Note: An earlier version of this article misquoted Derk Holt's forecast for the Canadian dollar. In fact, he sees the loonie hitting 74-77 (CADUSD) in 2018. BNN regrets this error.