Since 2014, we have seen significant supply come into the oil market and the demand is declining, meaning the basic supply and demand equation is completely distorted. At the very core, it suggests that oil prices could go much lower. In fact, we have seen forecasts for crude oil to go to $10.00 a barrel.
If oil prices continue to dive, this will continue to send the CAD/USD pair much lower.
Sadly, there are more headwinds for the loonie ahead. There are three phenomena that must be watched closely: the Bank of Canada’s action on interest rates, economic data on the Canadian economy, and the Canadian government’s budget.
The Bank of Canada lowered rates not too long ago. Now we are hearing a significant amount of noise that suggests we could see another interest rate cut. There’s even talk of negative interest rates! Simple economics say that if interest rates go lower, the CAD/USD rate will go lower.
The Canadian economy isn’t looking good either. The unemployment rates continue to increase, the Canadian gross domestic product (GDP) growth rates are declining, and a deep recession isn’t a farfetched idea for the economy. Plus, manufacturing in the country is facing scrutiny. Once again, this is not good for the loonie whatsoever.
The current government ran on the promise of spending more. The country’s finance minister, Bill Morneau, just recently began his consultation with provinces. In a speech at the Halifax Chamber of Commerce, Morneau said, “The challenge is greater than we expected [when elected].” (Source: “Bill Morneau kicks off pre-budget consultations with Halifax speech,” CBC, January 11, 2015.)
Essentially, this could be a hint that the government will spend more than it originally anticipated. How does it affect the Canadian dollar? Higher government spending leads to higher national debt and it could mean more downside for the currency.
Canadian Dollar Outlook Bleak at Best
No matter how you look at it, the Canadian dollar outlook for 2016 is bleak at the very best. The fundamentals are not with it and, as it stands, there’s really no light at the end of the tunnel. In other words, the CAD to USD exchange rate could continue to crash further.
Look out below!
Don’t be shocked if we see the CAD/USD exchange rate hit US$0.62—its lowest level since 2002.