Canadian Dollar: Will the CAD to USD Rebound in 2016?

Canadian DollarIs There Any Hope for the Canadian Dollar?

I remember when the Canadian dollar was at parity with the U.S. dollar. It was, after all, only a few years ago that the CAD to USD exchange rate was sitting at an even $1.00, so what exactly happened in between? Is it ever going to rebound?

As a Canadian citizen, I certainly hope it does. Transferring money into U.S. dollars has become a torturous process these days. I hand a fistful of bills to the nice lady at the currency exchange booth and she only hands me a slim envelope back. Oh, the pain.

But as someone who writes about the economy, I have to face harsh truths: the Canadian dollar won’t touch above $0.90 anytime soon. Heck, I don’t even think the currency will top $0.80. It’s far more likely we’ll see the CAD to USD sustain even bigger losses.

This is a bit of a contrarian take at the moment, seeing as the CAD to USD is up from its January lows of $0.68. Personally, I think the optimism is completely hollow.

There was no fundamental change in Canada’s underlying economic strength after the crash, nor is there any indication of future growth. The market simply rebounded as oil prices showed some movement to the upside, but that spike will be short lived.

Here’s why.

America’s northern neighbor emerged from the 2008 financial crisis relatively unharmed. Its banks were in far better shape than their U.S. counterparts. This gave most people, including investors, the impression that Canada was a safe haven for capital, a place insulated from international turmoil.

What they failed to recognize was that Canada had also survived because oil prices were incredibly high at that time. North America was in the middle of the shale renaissance and oil production was surging in Canada and the U.S.

Luckily for Canada, its economy was heavily focused on two things: oil and real estate. The outsize dependence on crude oil prices helped shelter the country from the global economic downturn, but that sword cuts both ways. When oil prices fell in 2014, it only made sense that Canada’s economy would tank.

And now we’re starting to see the second pillar of Canada’s economy start to falter. Excluding Vancouver and Toronto, home prices actually fell nationwide in 2015. (Source: “Canadian Home Prices Soar 17% In A Year, But There Are ‘Radical Regional Differences’,” Huffington Post, February 16, 2016.)

Canada’s housing bubble could burst as a result of the economic slowdown, mainly because home prices simply can’t keep up this enormous pace of growth if wages are falling and unemployment is rising. That’s Econ 101.

We hear “slower economic growth” and it makes the pain of a recession sound distant and abstract, but it really means that people lose their livelihood. Many of them have to foreclose homes, or work two or three part-time jobs. It’s painful and messy.

So when I see a slight uptick in the CAD to USD, but no shift in the underlying conditions, I tend to ignore it. The market always aligns with fundamentals in the end, which makes me fairly certain the Canadian dollar is headed back below $0.70.