CAD to USD: The Case Against the Canadian Dollar

Major Downside For CAD to USDMajor Downside for CAD to USD?

The CAD to USD exchange rate has seen a solid move to the upside recently, up roughly nine percent year-to-date. Sadly, this could be just a dead cat bounce. Major downside could be ahead for the Canadian dollar.

This may sound bold, but it must be said: if you are bullish on the Canadian dollar, you could be making a very big mistake.

Here’s what must be understood: A rising CAD to USD exchange rate is not good for Canada. Why? If the Canadian dollar rises against the U.S. dollar, Canadian goods become expensive to Americans—and Canada exports a significant amount of goods to the U.S.

Consider this: In 2015, Canadian exports to the U.S. amounted to $397.06 billion. The United States was hands down the biggest exporting market for Canadians. (Source: “Imports, exports and trade balance of goods on a balance-of-payments basis, by country or country grouping,” Statistics Canada, last accessed June 9, 2016.) This has been the case for a very long time.

Now, if you were the Bank of Canada and you were looking at this predicament, what would you do? Chances are you would think about lowering the value of your country’s currency and one tool you could use to do just that is lower interest rates.

Another factor that doesn’t get talked about much in the mainstream media is that the CAD to USD exchange rate has an interesting relationship with the U.S. economy.

Before going into details, please look at the chart below of the CAD to USD pair and the U.S. gross domestic product (GDP) plotted behind it. This chart spans from 2008 to 2009. It should really amaze you.

canadian dollar to us dollar indx chart

Chart courtesy of www.StockCharts.com

One would expect the Canadian dollar to go up as the U.S. economy slows down, but this didn’t happen last time there was a slowdown in the U.S. Instead, the Canadian dollar declined in value as well.

With this in mind, how does the U.S. economy look? Simply put, it’s struggling.

Not too long ago, we found that in the month of May, the U.S. economy added just 38,000 jobs. Previous months’ figures were also revised lower. This is not an indicator of a growing economy.

Other economic data also suggest the U.S. economy isn’t growing as it was originally anticipated by economists—or even the Federal Reserve. This could be bad for the Canadian dollar.

Lastly, don’t forget oil. Oil has a lot of influence on the CAD to USD rate. Recently, oil has seen a move to the upside, despite the basic economic situation remaining the same—there’s an abundance of oil, but demand is struggling.

You really have to question if oil can stay above $50.00 for a sustained period. And if it does, won’t producers flood the market with more oil in order to sell at a higher rate as quick as possible?

This could have a dire impact on the CAD to USD exchange rate.

Canadian Dollar Outlook: Dismal

No matter how you look at it, all the signs point to a much lower CAD to USD exchange rate. What we have seen year-to-date should be taken with a grain of salt. For it to be taken seriously, there should have been major economic news out of Canada and there hasn’t been.

Here’s what I will say: Don’t be shocked if the CAD to USD exchange rate resumes its downtrend that it began in 2011. There are still reasons to believe that the currency pair could hit its 2002 lows of around US$0.62.