CAD to USD: Could This Spark a Canadian Dollar Collapse in 2016?

CAD to USDMore Downside for the Canadian Dollar

Oil prices have rebounded for the past few weeks, accounting for the depreciation in the USD to CAD exchange rate, which found support at US$1.28417. The downward trend of the Canadian dollar has few chances of reversing, given the sustained upside potential in the West Texas Intermediate (WTI) crude oil price, at least in the short term. (Source: “USDCAD heads lower as oil rises on Doha expectations,” Forexlive, April 11, 2016.)

More significantly, the U.S. dollar has experienced a downtrend after the Federal Reserve reneged on lifting interest rates yet again. This has weakened the greenback’s value. Nevertheless, while USD weakness could perpetuate a continuation of the downtrend of the USD to CAD exchange rate and possibly a breach the $1.29 exchange rate, there are rumors that the Bank of Canada (BoC) will continue a dovish interest rate policy at its next meeting on April 13. The BoC’s rate decision will be the next big catalyst for the USD to CAD currency pair.

Canadian exports and tourism have improved, especially in currency rate–sensitive sectors of the economy, such as services and tourism. Moreover, the Canadian jobs market posted strong gains in March, which contributed to lowering the unemployment rate from 7.3% to 7.1%. In previous decades, that might have prompted an interest rate hike to control inflation; however, the BoC’s goal is to boost the economy and actually increase inflation. Given that the current interest policy is working, the central bank will not want to risk reversing the course. (Source: “USD/CAD: Canadian Dollar Simply Bullish Vs US Dollar,” FX News Call, April 11, 2016.)

The Canadian economy, despite the low price of oil, has managed to create 41,000 additional jobs, mostly in the services sector, as we might expect. In the span of a year, employment has grown by 130,000 jobs, though mainly of the full-time variety, unlike what happens in the U.S. Also note that the number of hours worked increased by 1.2% per year.

The real driver that’s pressing for a continuation of low interest rates—if not even a further cut—is the industrial sector. Manufacturing lost 32,000 jobs, which puts pressure on the BoC to avoid any increase. This weighs on the USD to CAD exchange rate.

In turn, the Fed says it will raise interest rates this year. A significant rebound in the U.S. economy certainly supports the optimism. Any improvement in the U.S. industrial sector tends to have bullish repercussions in Canada. Canadian manufacturing sales could reach their best levels in years where the United States is concerned.

The economic recovery in the U.S. and exchange rates are favorable to exports. Canadian manufacturers, many of which have suffered from competition from Asia since the early 2000s, may recover thanks to the strong USD to CAD exchange rate.