Canadian Dollar Outlook for 2016
Unless you’ve been hiding under a rock, you may have noticed a crash in the Canadian dollar last year. The CAD to USD got pummelled all through 2015 and it’s had a disastrous effect on Canadians.
To put it a different way, imagine that you’re a regular Joe working in Alberta, Canada. You moved out there because the oil industry was booming and jobs were plentiful. That was three years ago.
Then came the crash. Oil production had accelerated too quickly, leaving the world with more sellers than buyers. There was a serious oversupply issue in oil markets, but no one knew what to do about it.
All around you, friends are losing their jobs. You manage to hang on, but fear gnaws at you every second of every day. Who’s to say that tomorrow won’t be your last day?
Imagine you’d put a downpayment on a house, gotten married, and were preparing to start a family. Now all that was in jeopardy, a nightmare from which you couldn’t wake.
On top of everything else, you notice that your grocery bill is ballooning. A head of cauliflower now costs $8.00? What is going on?! Are things going to get better?
The Causes of a Weaker Canadian Dollar
The situation I outlined above is all too real for many Canadians. My colleagues and I got phone calls from friends and relatives who worked in Alberta. They all said the same thing: things are looking really bad.
From what they told us, the recession is visible everywhere you go in Fort McMurray, a core employment area for the Alberta oil sands. Overgrown grass spills onto the walkways of empty houses. Either the owners lost their jobs or they were working too many part-time jobs to care. The unemployment rate has nearly doubled in the little oil-producing town.
Local shops have gone out of business from the sheer lack of demand.
Worst of all, the pain and devastation in Alberta promises a Canadian dollar crash in 2016. Natural resources are 50% of Canada’s exports, making them a huge factor in the economy. When natural resources prices fall, so, too, does the Canadian dollar.
So how do we reverse the slide? Is there a particular strategy, some magical balm to soothe the CAD to USD? Unfortunately, no, there isn’t. There is no cavalry waiting beyond the next hill. The Canadian dollar is simply the collateral damage of a global energy conflict.
Neither Russia nor Saudi Arabia are going to cut back on oil production. And the Islamic Republic of Iran will rejoin world trade, adding to an already crowded market. Everybody seems to be playing a giant game of chicken, waiting for others to exit and hand over market share. This is how energy politics work.
I’m not naïve; I understand the reality. The Canadian economy is unlikely to recover at any point in 2016, which means the Canadian dollar could drop even further. We could see the CAD to USD hit $0.61 before the year is out.
It’s a vicious cycle. The weak loonie makes everything more expensive for Canadians, who then cut back on how much they buy. But by spending less, they weaken the economy and increase the chances of a Canadian dollar crash in 2016.
We’re stuck in a spiral that all but guarantees a lower CAD to USD.