What to Expect on the Canadian Dollar
A devastating new report on Canada’s economy has crushed hopes of a recovery in the Canadian dollar. It seems like a lower CAD to USD exchange rate could become status quo.
According to Econ 101, this should be a bittersweet moment. Canada’s imports would get more expensive, that’s true. But its exports would become much cheaper relative to other countries. That’s the tradeoff.
Except, of course, that Canada is a resource-based country. Its economy is built on natural resources and a housing market boom; that’s roughly the whole package.
In fact, crude oil from Alberta is one of the country’s main exports. Yet crude prices are currently in a disastrous slump. WTI prices crashed from $100.00 to $30.00 a barrel last year. And since Canada’s oil is already more expensive to extract, the dip in its currency won’t boost exports.
It’s basically a nightmare scenario.
Economists Slash Outlook of Canadian Economy
The Organisation for Economic Co-Operation and Development (OECD) is one of the leading economic centers in the world. It’s based in Paris and employs a world-class group of economists. They just downgraded their forecast for gross domestic product (GDP) growth in Canada.
The OECD now predicts that Canada will grow at 1.4% in 2016. Back in November, that number was as high as two percent. It’s a stark reminder of just how quickly things can deteriorate. (Source: “OECD slashes Canada’s outlook, warns ‘urgent’ global action needed,” The Globe and Mail, February 18, 2016.)
We’ve been calling a drop in the loonie for some time now, so it’s nice to see the mainstream sources finally catching up. I still think the OECD report is too bullish, but that’s to be expected.
This pattern of downward revisions is an old trick it uses. The OECD knows things are going to get much, much worse for the Canadian economy, but it’s also aware of its own power. If the OECD came out and flat out predicted a recession in Canada, markets would go into a tailspin.
Since the OECD wants to avoid that, its cuts are done in stages. A little cut to estimates here, a little slash there…and all of a sudden we’re looking at a number that’s much more bearish.
Mark my words: the OECD will probably keep slashing their forecasts.
It’s because a weaker CAD to USD rate doesn’t heal the Canadian economy. It won’t bring “equilibrium,” as the economists would like to believe. This is a scenario in which that weakness keeps snowballing. There is little to no hope for the Canadian dollar.