Canadian Dollar Setting Up for a Big Drop
Since the beginning of 2016, the CAD to USD exchange rate has rallied. Don’t buy into this whatsoever. This is a short-lived phenomenon. The Canadian dollar is headed much lower.
Before going into any details, I want you to step into the shoes of the Bank of Canada’s governor, Stephen Poloz.
Now, consider the loonie has increased roughly 10% against the greenback in a matter of a few months. This makes Canada less competitive when it comes to exports. Then let me ask you this: as the governor of the Bank of Canada, would you let the Canadian dollar continue to rise?
The rise in the CAD to USD is already hurting Canadian exports; in March, exports to the U.S. declined 6.3%. (Source: “Canadian international merchandise trade, March 2016,” Statistics Canada, May 4, 2016.)
Before you jump to any conclusions, keep in mind that the United States is Canada’s biggest trading partner.
You see, if I were the governor of the Bank of Canada, I would be inclined to work to lower the loonie. If I didn’t, the Canadian economy would get hurt. Remember that exports add to Canada’s gross domestic product (GDP), so when they decline, so does Canada’s economy. Having said that, the Bank of Canada is just one factor to consider when looking at the CAD to USD. Look at the Canadian dollar chart as well.
Chart courtesy of www.StockCharts.com
The long-term trend for the CAD to USD exchange rate remains down. And the movement we have seen since the beginning of 2016 looks to be nothing but a dead cat bounce.
Here’s something you should keep in mind: when it comes to currencies, don’t fight the trend. In the currency markets, trends tend to remain in place for a long time.
For the Canadian dollar to turn to the upside, it will have to break above the 200-week moving average—it’s near 0.89, or roughly 13% higher compared to where it currently sits. All I am going to say here is that for that to happen, there will be an uphill battle. We will need a lot of buyers—and the Bank of Canada to remain on the sidelines.
Lastly, don’t forget the relationship between oil prices and the CAD to USD exchange rate.
The correlation between the two is phenomenal. If oil drops, the CAD to USD drops. For the past few months, we have seen a rally in oil prices for speculative reasons. Sadly, the fundamentals of the oil market remain anemic—there’s a supply glut and global growth is stalling. The rally in oil could be very short-lived, too. This will surely impact the CAD/USD currency pair.
Canadian Dollar Long-Term Outlook
My long-term readers know I have been bearish towards the CAD to USD exchange rate for some time now. My stance hasn’t changed. I am taking the rally in the CAD/USD with a grain of salt and believe that it will head lower.
How low could the Canadian dollar go? I continue to expect the exchange rate to see the lows made in 2002—a collapse of 20% from where it currently trades. Mind you, don’t expect it to happen overnight. Give it some time.
What could change my forecast? If the Bank of Canada comes out and says it’s comfortable with the level at which the Canadian dollar currently sits, this could have a positive impact on the currency. And the CAD/USD could go higher.