Is the Canadian Dollar Doomed?
Beware if you are bullish on the Canadian dollar. The CAD to USD exchange rate is up roughly 10% year-to-date, but only take this with a grain of salt—there could be major downside ahead.
There are essentially three reasons why being bullish on the CAD to USD could be a dangerous trade. In fact, the following three reasons suggest the collapse of the loonie is far from over.
One of the first things you have to keep in mind is that trends in the currency markets can remain in place for a long time. Currently, the trend on the CAD to USD pair is pointing downward. Please look at the chart below and pay close attention to the blue line. The blue line is the 200-week moving average, also called the long-term trend line.
Chart courtesy of www.StockCharts.com
At the very core, the chart says two things: the long-term trend is downward and it’s very persistent.
The second thing to keep in mind if you are bullish on the CAD/USD is what a rise in the loonie can do to the Canadian economy. Consider this: according to the World Bank’s data, between 2011 and 2015, exports amounted to little more than 30% of Canada’s gross domestic product (GDP). (Source: “Exports of Goods and Services,” The World Bank, last accessed April 14, 2016.)
Now, for every one percent the Canadian dollar rises against the U.S. dollar, Canada’s exports become more expensive by that same amount. At the end of the day, a stronger loonie could impact the Canadian economy.
Put yourself in the Bank of Canada’s shoes. Its main goal is to boost the Canadian economy. Would you let your currency appreciate and miss out on economic growth? If I were the Bank of Canada governor, I would think of ways to bring the value of the loonie lower, so that I can meet my targets.
The last, but not the least, thing you have to consider when looking at the CAD to USD pair is commodity prices. One of the biggest reasons the Canadian dollar’s value increased was because oil prices had increased. But will oil prices remain at these levels for an extended period of time? I highly doubt it. You see, there’s glut in the global oil supply and there haven’t been any major cuts in production. Even worse, global oil production is expected to increase soon. This will put downward pressure on oil prices, which will ultimately take the CAD to USD pair much lower.
CAD to USD Outlook for 2016: Dismal at Best
In January, I wrote that I would not be shocked if the CAD to USD exchange rate hits $0.62—the lowest level since 2002. (You can read more here “CAD to USD: Could the Canadian Dollar Hit $0.62?”)
My view on the CAD to USD remains the same. This statement may sound bold, but the recent move in the currency pair could be nothing but a dead cat bounce. Know this: for the CAD/USD to hit $0.62 from its current levels, it will have to decline just 20%.
With all this said, there are two factors that could change the whole forecast: if oil prices really move to the upside, to above $60.00 a barrel, and if the recently released government budget does more than is expected. Until then, the loonie is on the verge of collapse.