What’s Next for the Canadian Dollar
The CAD/USD exchange rate is making fresh lows on Friday, as the loonie continues its devastating freefall. If you’ve been following, we at Profit Confidential had predicted the Canadian dollar collapse way ahead of time.
Once again, I’m ready to give my word on it that it won’t be long before you see a blast from the past. Yes, predictions of those all-time lows of 2002, at nearly US$0.61, are not a figment of our imagination anymore.
Why Is the Loonie Tanking?
The forecast would be incomplete if I didn’t give you the causal factors for this chaos. While there is a flurry of events that led to its demise, there are two significant factors that are particularly making matters worse right now.
Somewhat needless to mention, the first is oil. Might I remind you that the loonie was once trading at par with the greenback? It was not until the oil rout began that this parity turned to disparity.
The global oil industry is undergoing a massive shift. The tussle between Saudi Arabia and its allies versus the Iranian-Russian juggernaut is adding fuel to the fire. None of the OPEC (Organization of the Petroleum Exporting Countries) members are ready to cut supply. Meanwhile, U.S. Congress unanimously lifted the ban on oil exports last month, which means that the U.S., too, is now contributing to the global oil glut.
At the same time, slowing growth in high-growth economies, particularly in China, which is the second-biggest importer of oil, is adding downward pressure on demand.
In fact, the oversupply and slipping demand is lending to growing global oil inventories. The result? Western Texas Intermediate (WTI) crude is hitting lows not seen in 13 years. Brent crude, which was once trading at a premium to WTI crude, has now tanked below WTI prices.
Case in point: nobody wants Canadian oil anymore! Since this is Canada’s biggest export, the Canadian economy and particularly the home of oil producers, Alberta, is in hot water amid fears of a Canadian dollar collapse.
Canadians are now calling out for help. The economy awaits a stimulus—either from the government, in the form of an expansionary fiscal budget, or from the central bank, in the form of a loosened monetary policy. The speculations on the latter are the second big factor adding pressure to the loonie.
Yes, it is being speculated that the Bank of Canada (BoC) will, sooner or later, slash interest rates to give a monetary boost to the economy. The rate cut will drive away foreign investment, which means lower foreign reserves will further depreciate the loonie. The fear is already causing a major dent in the CAD to USD exchange rate.
While the depreciating Canadian dollar will have numerous macroeconomic repercussions, I’m more focused on the micro level—that is, what this means to the average Canadian.
In a nutshell, Canadian households will be the biggest losers should the Canadian dollar collapse. They’ll soon be seeing prices of basic necessities skyrocket. The fact that Canada imports significantly from its southern partner means the weakening loonie will primarily translate into inflation in the fruit and vegetables market. Certainly, low-income families will be the hardest hit.
The Bottom Line on the Canadian Dollar
With the end to the ongoing price war in oil exporting countries nowhere in sight and the chances of a monetary stimulus becoming nearly certain, the loonie will continue to tank. I’m making a call for US$0.61, and meanwhile not striking off the possibility of a Canadian dollar collapse this year.