CAD to USD: Here’s Why the Canadian Dollar Is Doomed in 2016

CAD USD Could Plunge FurtherThe Canadian dollar just can’t find a bid! On Friday morning, the CAD to USD exchange rate hit as low as $0.7072, making investors wonder whether it’s possible to break below the 70-cent mark.

Bleak Outlook for Canadian Dollar

However you look at it, the U.S. economy is doing much better than our neighbor to the north.

On Friday, the U.S. Bureau of Labor Statistics reported a tremendous jobs report. In the last month of 2015, the U.S. economy added 292,000 jobs, a much better number compared to the 200,000 additions expected by economists. It was also an improvement over the 252,000 positions added in November. Moreover, the U.S. unemployment rate stayed at five percent, a seven-year low. (Source: “Employment Situation Summary,” Bureau of Labor Statistics, January 8, 2016.)

Although Canada also added jobs, things might not be as rosy when you take a closer look at the numbers. In December, the Canadian economy added 23,000 jobs. However, the economy was losing full-time jobs—6,400 to be exact. The private sector lost 9,000 positions, while the public sector lost 8,400. The headline growth number was driven by the addition of 29,200 part-time jobs and 40,300 self-employed positions. (Source: “Labor Force Survey,” Statistics Canada, December 2015.)

Of course, it doesn’t help the Canadian dollar that oil prices continue to fall, too. On Friday morning, West Texas Intermediate crude was trading below $33.00 a barrel.

On the supply side, the Organization of the Petroleum Exporting Countries (OPEC) hasn’t made plans to cut back production whatsoever. Despite oil demand being relatively inelastic in the short run, growth in the global economy is slowing down. This could translate to less demand for oil in the long run—meaning even lower prices if OPEC doesn’t cut back on production.

Combining huge supply and slowing demand, oil prices could stay low or become even lower. With Canada exporting 2.9 million barrels of crude oil to the U.S. per day, plunging oil prices could put a lot of downward pressure on the CAD to USD exchange rate. (Source: “Company Level Imports,” U.S. Energy Information Administration, December 31, 2015.)

A weaker currency makes a country’s products relatively less expensive and that should be good for that country’s exports. The case seems to be true for Canada. According to the latest report for November 2015, Canadian exports grew for the first time in four months. Exports to the U.S. did particularly well, rising 1.3% for the month, while exports to China, Canada’s second-largest trading partner, surged an impressive 6.2%. (Source: “Monthly Report on Canada’s International Merchandise Trade Performance, November 2015,” Global Affairs Canada, January 6, 2016.)

The growth in overall exports was driven by improvements in metal ores and minerals, motor vehicles, and forestry. Energy exports, on the other hand, slipped by 6.6% and hit their lowest level since May 2009.

Note that other than the growth in exports, Canada’s imports fell in November, resulting in the country’s trade deficit narrowing from $2.5 billion to $2.0 billion.

That should be good news for the loonie right? Well, not really. Improvements in trade balance didn’t help much, as the Canadian dollar continued to sink against the U.S. dollar.

The Bottom Line on the CAD to USD Exchange Rate

The U.S. Federal Reserve just made its first interest rate increase since the financial crisis in 2008/2009.

Canada’s central bank, on the other hand, might be thinking of doing the exact opposite. In fact, in 2015, the Bank of Canada cut its benchmark interest rate twice, trying to stimulate the economy.

On Thursday, Bank of Canada Governor Stephen Poloz said that he wound not try to match the recent rate increase in the U.S. When talking about oil and the Canadian dollar, he said, “The depreciation of our currency is a natural part of the process.” (Source: “Stephen Poloz Says Divergent Monetary Policy May See Loonie Lower,” CBC News, January 7, 2016.)

With that in mind, let’s get ready to see how natural forces could take down the CAD/USD exchange rate even further in 2016.

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