CAD to USD Depends on Oil
The Canadian dollar has found some much-needed strength in the last month or so, but we don’t actually know if the CAD to USD exchange rate can maintain this bullish run.
After all, the economy is still facing real threats that won’t magically disappear. Maybe they’ve faded into the background since January, but the anchors that were weighing down the Canadian dollar then are almost certainly still there.
I’ve written quite a lot about these anchors. The main problem for the Canadian dollar is that its underlying economic strength was built on a resource-based economy. You live by those commodities in their boom times, and you suffer by them in the bad times.
Unfortunately for Canadians, the bad times tend to outweigh the good. It’s what economists call the “resource curse.” Economists have collected significant data that says countries that depend on exporting natural resources have weaker growth than those that invest in innovation. Since more than half of Canada’s exports are commodity-based, I’d say it falls squarely into the group of countries with an overdependence on natural resources.
I forecasted a massive crash in the Canadian dollar as oil prices fell from $100.00 a barrel to $30.00 a barrel. I was right. The CAD to USD exchange rate fell roughly 20% in 2015, a devastatingly large drop in terms of currency depreciation.
I worried that such a dramatic decline could rupture Canada’s housing bubble. Once again, my predictions were correct. If you remove Vancouver and Toronto from the calculation of growth in home prices, it turns out that prices fell by 0.3% in 2015. (Source: “Canadian Home Prices Soar 17% In A Year, But There Are ‘Radical Regional Differences’,” Huffington Post, February 16, 2016.)
This is exactly the picture I painted a few months ago. The blow to Alberta’s housing market was obvious because it is where the oil industry is concentrated, but I forecasted that crack would spread across rural Canada as the economy worsened.
It’s only a matter of time until the fracture extends to Toronto and Vancouver. However, there is one thing—and one thing only—that could ultimately save the Canadian dollar: higher oil prices. If crude rebounded, I could envision a resurgence in the CAD to USD.
But that’s where we run into the murky world of international oil politics. Energy security is a pretty big deal to all countries, but even more so to Saudi Arabia, Iran, and Russia. The only way the price of oil can rise is if all three of these countries agree to scale back their production. Right now, those odds aren’t looking good. (Source: “Saudi Arabia Will Only Freeze Oil Production If Iran Joins,” Bloomberg, April 1, 2016.)
So if things are so bad, how come the Canadian dollar has been on a tear lately?
Good question. I think a lot of it has to do with Canada’s “dreamy” new prime minister. Justin Trudeau has captured the international spotlight for his plan to revitalize Canada’s economy…well, that and for his funky socks.
Yet I don’t see how Trudeau can change anything. So long as oil prices stay weak, so will the Canadian dollar. When it comes to the CAD to USD exchange rate, I’d wager that another year of double-digit losses is more likely than a year of double-digit gains.