Traders Fear This Could Crush the Canadian Dollar in 2016

Canadian DollarThis Could Hammer the Canadian Dollar

The CAD to USD exchange rate hit another multiyear low on Thursday, but traders fear a new measure from the Bank of Canada (BoC) could spell more bad news for the Canadian dollar in 2016.

The Loonie dipped briefly below US$0.71 during the trading session. This is the first time the Canadian dollar has traded below this level since August 2013, as it was recovering from a historic low of US$0.62 set in January 2002.

The drop comes after the Bank of Canada (BoC) announced the possibility of emergency stimulus measures. In January, the central bank slashed interest rates to prop up the country’s economy and avoid a recession. However, in a written note released ahead of a speech scheduled for Thursday in Ottawa, Governor Stephen Poloz hinted more support may be needed.

“We have a number of tools at our disposal—both conventional and unconventional—to mitigate risks to our inflation target or to our financial system, should they arise.” (Source: “Life After Liftoff: Divergence and U.S. Monetary Policy Normalization,” Bank of Canada, January 7, 2016.)

“The Bank of Canada will continue to run an independent monetary policy, anchored by our inflation target, and we will use our tools to manage risks along the way.”

What those tools might be are still an open question. Traders are speculating the BoC will drop its target rate a quarter-point to 0.25%, where it bottomed in 2009–2010. More than one-fifth of participants now see interest rates going negative by the end of 2016, according to the overnight index swap market. (Source: “Chance of rate cut rising as markets anxiously await details of Trudeau’s stimulus rescue,” The Financial Post, January 5, 2016.)

Such measures could devastate the CAD to USD exchange rate. With lower returns on their deposits, investors would be tempted to sell their Canadian dollars for foreign currencies. On Tuesday, Bank of Montreal Chief Economist Douglas Porter predicted the loonie could fall below US$0.70 before finding a bottom. (Source: “Loonie below 70 cents U.S. ‘doesn’t seem that far away’,” The Toronto Star, January 6, 2016.)

Negative interest rates, if ever implemented, would hammer savers, too. Under such a proposal, financial institutions would be forced to pay interest on overnight deposits held at the BoC. In Europe, such policies have actually forced savers to pay banks interest on deposits. (Source: “Banks are supposed to pay savers, right? Not this one,” CNN Money, February 12, 2015.)

Traders will be listening for more details on such stimulus measures in Governor Poloz’s speech Thursday. If the central bank is forced to cut interest rates further, it could spark another downturn in the Canadian dollar.

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