Temporary Highs for CAD to USD Exchange Rate
The Canadian dollar has enjoyed a glorious run for the last two months, but it was only the calm before the storm. The CAD to USD exchange rate slipped by about two pennies this week, showing that the loonie’s honeymoon period is over.
Markets are about to break the Canadian dollar. In fact, it probably would have happened already if Canada hadn’t elected such a “dreamy” Prime Minister.
Media outlets all over the world abandoned any pretense at journalism to gush over Justin Trudeau’s hair, his eyes, even his socks! The media put him, the “sexiest politician in the world,” on a pedestal. And he is taking full advantage of this celebrity status.
Trudeau unveiled a stimulus package in March that treats tax dollars with the same respect he probably shows his own trust fund. This is a guy who inherited a fortune from his father, so it’s no surprise he thinks money solves all problems.
His plan is heavy on infrastructure spending. He thinks Canada can afford to snub the oil and gas industries, but fixing a few potholes might save the country’s currency from a steep plunge. Ok…let’s play this scenario out.
You should know that Trudeau’s star power was enough to convince the Bank of Canada (BoC) to push back its planned rate cut.
They wanted to see Trudeau’s stimulus plan before acting. If he could save the economy, the Canadian dollar would surge and the BoC wouldn’t have to do a thing. (Source: “Bank of Canada holds key interest rate as it waits on Ottawa’s fiscal boost,” The Financial Post, March 9, 2016.)
After all, the BoC had reason to believe Trudeau was the savior of Canada’s economy. That’s what the media kept telling them.
A majority of liberal economists favored the spending bill (even while knowing it would balloon the deficit). (Source: “Trudeau Stimulus Plan Puts Canada C$120 Billion Into the Red,” Bloomberg, March 22, 2016.)
They hoped infrastructure spending would help put the Canadian economy out of its slump.
But no amount of government stimulus is going to help. Any construction jobs created by the infrastructure package will vanish as soon as the gravy train runs dry. That much is obvious. Short-term fixes won’t save the Canadian dollar.
What does the Canadian economy lean on at that point? An oil industry that’s been crushed by low prices? A housing bubble on the verge of collapse?
When Trudeau’s plan fails, and it will, the Canadian economy will be devastated.
At that point, there will be no hope for the Canadian dollar. The Bank of Canada will have to do what every other central bank is doing. It will push interest rates negative.
Just to be clear, when a central bank cuts interest rates, they want the currency to fall. That’s what a rate cut is meant to achieve. So pushing rates negative would guarantee a gigantic fall in the CAD to USD. That’s the bottom line.