Rate Cut Could Crush the Canadian Dollar
The Canadian dollar has been tanking ever since the U.S. Federal Reserve raised its federal funds rate. The Canadian finance minister and Bank of Canada governor, along with other bigwigs in the game, will now put their heads together by the end of this month to decide the next Bank of Canada monetary policy move. How will it impact the loonie and CAD/USD exchange rate?
Pressure is mounting on Canadian Prime Minister Justin Trudeau, as all eyes are now turning toward him for a fiscal stimulus move in the upcoming budget announcement. But it appears that before this impending fiscal stimulus, Canada might see a monetary push from the Bank of Canada (BoC).
Canada’s central bank is expected to announce on January 20 whether it will be making an interest rate cut or not. However, speculations are solidifying that, after having run out of options, the BoC will almost certainly slash interest rates by the end of this month. Reports say the chances of a rate cut are a good 40% now and growing. (Source: “Chance of rate cut rising as markets anxiously await details of Trudeau’s stimulus rescue,” The Financial Post, January 6, 2016.)
In fact, the market is forecasting that Canadians might, for the first time in history, witness negative interest rates!
Even if the BoC goes for the most modest cut, the interest rates will end up at around 0.25%, back at the 2009 lows.
A rate cut would make Canadian investments less attractive, keeping foreign investment out of the country. This should further hammer the loonie. However, the historical movements in the Canadian dollar have been less predictable over the long run, as historically, they have been more closely aligned with oil prices than with interest rates.
Chart courtesy of www.StockCharts.com
The Canadian economy’s biggest revenue source, oil has been struggling to find a bottom for the last year. It seems like there’s no end to this perpetual fall, as the “black gold” just keeps tanking, setting new records each passing day. Likewise, the CAD to USD exchange rate has been in a parallel decline.
On the side, the rate cut will further add to the country’s debt, as household debt will head skyward and investment capital will leave the country to head south. In fact, the Canadian household debt to disposable income ratio had already hit record-highs by the end of 2015.
Simply put, an interest rate cut could spell disaster for the Canadian dollar and CAD/USD exchange rate.