After a long downward journey, the CAD to USD exchange rate seems to have found some support. However, there are signs that confirm that the Canadian dollar forecast might see more downside ahead.
I’m seeing two factors in play that are likely to bring down the Canadian dollar and USD/CAD pair.
Firstly, four letters are sending tremors across global markets—N.I.R.P.!
Central banks of all of the biggest economies are moving in tandem. From Asia to Europe to North America, low interest rates have become commonplace. In a futile attempt to boost their struggling economies, central banks around the world have been cutting rates.
Some central banks seem to have gone a little too far in their efforts. The European Central Bank (ECB) and the Bank of Japan (BoJ) are worth a mention here. The two have surprised us with something we were previously unaccustomed to seeing—a negative interest rate policy (NIRP).
These global economic troubles are now spilling over to the U.S., pushing the U.S. Federal Reserve to contemplate a similar policy move. Yes, Fed Chair Janet Yellen has categorically said that negative interest rates are not off the table.
If the world’s biggest and most sustainable economy is feeling the heat, imagine what must be happening in Canada, a country closely tied to the U.S. and already battling a recession.
The Bank of Canada is now under pressure to match its policy with its global counterparts in order to save the Canadian economy. In fact, it is rumored that the Bank of Canada may eventually go down the same path as the ECB and BoJ—that is, pushing interest rates into negative territory.
Negative or not, an interest rate cut can have one—and only one—impact on the Canadian dollar and that is depreciation!
The second headwind is oil. Canada is heavily reliant on oil prices, since the commodity makes up the biggest portion of its foreign exchequer. This is where the country makes most of its money. However, oil has fallen in a downward spiral and the fall has perpetuated to 13-year lows.
If you look at the historical price trend of the CAD/USD pair with oil, the close association between the Canadian dollar and former “black gold” becomes obvious. The two have historically moved in tandem.
Chart courtesy of www.StockCharts.com
Some are optimistic that the oil rout will sooner or later reverse. Statistics, however, indicate that oil prices are not going up anytime soon. The oil industry is facing a massive glut, with the oil supply currently outweighing demand by 1.7 million barrels a day. (Source: “The Oil Industry Got Together and Agreed Things May Never Get Better,” Bloomberg, February 12, 2016.)
Since none of the oil-producing nations are ready to cut supply, oil prices will remain depressed in the days to come. Ultimately, so will the Canadian dollar.
From a rational perspective, the Canadian dollar is likely in for more downside. I’m seeing the CAD to USD exchange rate heading further south this year.
My Canadian dollar forecast for 2016: further downside ahead.