Since the CAD to USD exchange rate hit a bottom in January 2016, it had mostly been climbing upward. But then, as we entered the fifth month of the year, the CAD to USD pair started showing weakness again. Now, analysts are saying that the worst could be yet to come for the Canadian dollar.
David Rosenberg is the chief economist and strategist at Gluskin Sheff + Associates Inc. He believes that right now, the Canadian dollar is treading in “dangerous waters.” (Source: “June has always been bad for the loonie and this one looks even worse as currency enters ‘dangerous waters’,” Financial Post, May 20, 2016.)
Rosenberg looked at a number of economic indicators to arrive at a rather bearish outlook for the loonie, but most of all, monetary policy may be the biggest factor. The Bank of Canada could adopt a negative interest rate policy (NIRP). The U.S. Federal Reserve, on the other hand, could do the exact opposite. A number of Fed officials have said that a rate hike in June is a real possibility. (Source: “Fed Officials Flag Potential for June Rate Increase,” The Wall Street Journal, May 17, 2016.)
Rosenberg’s conclusion is this: “The Canadian dollar looks vulnerable here.” (Source: Financial Post, op cit.)
Adam Cole, head of foreign exchange (FX) strategy at RBC Capital Markets, shares Rosenberg’s view. In particular, he pointed out why June has always been a bad time for the CAD to USD exchange rate.
You see, billions of dollars worth of Canadian bonds are coming up for redemption in June. Some are held by foreign investors. If they decide not to reinvest those proceeds back into the Canadian market, the country could see sizable capital outflow in June.
Cole said, “the trend in recent years has been for less-than-full reinvestment—at least immediately—and a large monthly capital outflow.” (Source: Ibid.)
What’s the best way to profit from a potential sell-off in the Canadian dollar? Buying the U.S. dollar looks like the obvious choice. But according to Cole, other G10 currencies could provide good opportunities as well.
“Year-to-date CAD is up around seven percent against both AUD and NZD and also three percent against EUR,” remarked the analyst. “Although we expect these trends to continue in the longer term, recent experiences suggest that a reversal of this powerful outperformance is a strong possibility in the coming months.” (Source: Ibid.)
The Bottom Line on the Canadian Dollar
Both analysts pointed out economic indicators as a weakness of the Canadian dollar. And indeed releases from Statistics Canada have been quite disappointing. Retail sales declined by one percent in the month of March, with motor vehicle and parts dealers showing the largest dollar-value decline. (Source: “Retail Sales, by Industry,” Statistics Canada, May 20, 2016.)
Gross domestic product (GDP) numbers did not cheer up investors, either. The latest release, which came out on April 29, showed that real GDP in Canada shrank by 0.1% in February. The manufacturing, mining, and energy sectors all slowed down. (Source: “Gross Domestic Product by Industry, February 2016,” Statistics Canada, April 29, 2016.)
With a slowing economy and an upcoming bond redemption, the outlook is bleak for the CAD to USD exchange rate going into June.