Stormy Seas Ahead for the Canadian Dollar
Markets absolutely decimated the Canadian dollar in 2015, when low energy prices weighed on Canada’s economy, dragging it into a recession. Now, as we approach the New Year, investors are curious to know what’s ahead for the CAD to USD exchange rate.
If you’re bullish on the Canadian dollar, then I have some bad news for you. From my vantage point, I don’t see much that can improve the outlook of the CAD to USD exchange rate, and that includes the Bank of Canada’s (BoC) emergency measures.
The BoC can cut interest rates as much as it wants, but that’s unlikely to change the situation. Canada simply doesn’t have an economy that makes stimulus effective. The country’s natural makeup of industries is skewed toward primary resources.
Does it really matter if our exports become a little more attractive with a weak Canadian dollar? At $35.00 a barrel for crude oil, I really don’t think so.
CAD to USD Could Plummet in 2016
Crashing oil prices were a major blow to the Canadian economy and the “loonie,” specifically because natural resources play an outsized role in Canadian exports. If there were a secondary place for capital to flow in Canada, it would probably be the housing market. Too bad that bubble is about ready to burst.
Imagine that you invested in oil firms with projects in Canada’s western provinces. All of a sudden, WTI crude prices do a nosedive from above $100.00 to nearer $50.00. You know that Canadian oil sands are cost-intensive, so you sell your stock.
Where do you reinvest? Do you put the money in real estate? Do you take it overseas instead?
By offering incredibly low interest rates, the Bank of Canada is implicitly encouraging borrowing. Whether by credit cards, loans, or mortgages, the BoC wants to induce spending in the economy. To do just that, it’s lowered the amount consumers have to pay in interest.
Now that makes housing sound incredibly attractive as an investment opportunity. After all, people will want to take advantage of low interest rates on major purchases and loans, thus increasing the demand for housing. Greater demand means higher prices, which ends with you sitting on a fat stack of profits.
While that’s a nice fantasy and all, reality is a little harsher. The Canadian housing market is way overheated and a ton of international agencies are warning of a huge correction.
The International Monetary Fund (IMF) was pretty blunt about it: “With weaker terms of trade, lower growth, and prospects of higher U.S. interest rates, Canada’s overvalued housing market may be cooling off. We will need to keep an eye on the risk of a hard landing.” (Source: “Canada’s Financial Sector: How to Enhance its Resilience,” International Monetary Fund, March 9, 2015.)
If that doesn’t sound serious to you, it’s because economists wrote it. Trust me, this is like putting a warning in big red letters. The phrase “hard landing” is just a fancy way of saying “crash” or “collapse,” meaning that housing would also be an investment mistake.
Canadian Dollar: Another 19% Decline?
Even though most people know the CAD to USD dropped this year, they probably couldn’t tell you by how much. The truth is scary. In just 12 months, the loonie fell by nearly 20% to a value of USD$0.72. How crazy is that?
Plenty of firms are closing up shop in Alberta, young folks are moving back in with their parents, and the housing market grows even more volatile. Altogether, this sad image of the Canadian economy virtually guarantees further declines in the CAD to USD exchange rate.
And when you factor in the Federal Reserve’s rate hike, it’s definitely possible to see another 19% decline in the relative value of the Canadian dollar.
To sum this all up in one depressing line, let me pass it over to Game of Thrones’ Ned Stark…