Canadian Dollar Keeps Plunging
Someone call an ambulance, because the CAD to USD exchange rate is in critical condition. Although I was expecting the Canadian dollar to continue dropping, the move to the short side has been far more forceful than I expected.
The devastation was highlighted by strength in the U.S. economy, particularly after the Federal Reserve raised interest rates in December.
The weak commodity market drained momentum from the Canadian economy at precisely the wrong time, raising some concern over the “Great White North.” However, the pessimism was contained by layover confidence in Canada’s structural integrity.
After all, wasn’t it just a few years ago when the Canadian economy proved more resilient to global economic turmoil than the much larger U.S. economy?
While Canada’s solid banking system did weather the financial crisis fairly well, that argument has a fatal flaw. This threat to the Canadian dollar didn’t come from the steel towers of Bay Street; it came from the oil sands of rural Alberta.
New Lows for the CAD to USD Pair
It’s been more than a dozen years since the Canadian dollar neared $0.70, so many people reserved hope that the bottom had been found. But that’s not so.
On Tuesday, January 12, the CAD to USD exchange rate broke below $0.70 a little after midday, showing there is no bottom to be found yet. All previous notions of what is or is not possible in a developed country like Canada should be forgotten. We’re dealing with raw economics now.
Chart courtesy of www.StockCharts.com
And the numbers are most certainly not in Canada’s favor. Canadian home prices are severely inflated, especially in major cities like Toronto and Vancouver. Those bubbles were able to manifest while the economy was strong and oil prices were above $100.00 a barrel. But those days have long since passed.
West Texas Intermediate (WTI) crude oil prices are at $30.00 a barrel right now, which puts Alberta’s entire energy sector into the red. Oil sands extractions are usually more expensive than drilling, meaning that even though other oil-producing countries are suffering, they are hurting less than Canada. (Source: “What oil at $20 a barrel would mean for Canada’s energy sector,” BNN, September 11, 2015.)
In fact, the price of oil is more than $10.00 below the break-even cost per barrel. It’s a complete mess. Not only is this slump a nightmare scenario for Canadian exports, but it does no favors to the housing bubbles I mentioned above.
What Lies Ahead for the Canadian Dollar
Think about it: natural resources are more than half of all Canadian exports. A commodity glut can spell doom to the broader Canadian economy, which would cost tens of thousands of jobs. Without jobs, people can’t afford houses.
Canada was actually in recession for the first half of 2015, but it wasn’t enough to puncture the housing market optimism. Economic turmoil was sweeping through China and political unrest was shaking Europe. However, the problems looked resolved by the third quarter and economic activity picked up—or so we thought.
We’re barely two weeks into 2016 and China’s stock market has already crashed a handful of times, while Europe is facing political upheavals over the refugee crisis. It’s shaping up to be a rough year, with no point of optimism for CAD bulls.
Further economic woes could push Canada back into a recession, killing jobs for tens of thousands. This time, demand for housing could fall enough to discourage builders from taking on new projects, crushing the housing bubble and decimating the Canadian dollar.