The Canadian dollar seems to be on the rise. Since dipping below $0.69 in January, the CAD to USD exchange rate has surged more than 15%. But before you rush out and buy the loonie, here are a few things to note.
Outlook Is Bleak for CAD/USD
Economic growth, or the lack thereof, could continue to be a major bearish catalyst for the CAD to USD exchange rate. While real gross domestic product (GDP) in Canada expanded by 0.6% in January, this kind of number probably won’t show up on February’s report. As a matter of fact, economists are expecting a 0.2% drop in Canada’s economic output in February. (Source: “GDP Data Will likely Show Canadian Economy Fell in February, Reversing Some January Gains,” Financial Post, April 25, 2016.)
According to Benjamin Reitzes, senior economist at BMO Capital Markets, “February’s performance is an emphatic exclamation point that the Q1 growth spike is not sustainable.” (Source: Ibid.)
In particular, Reitzes said that Canada’s GDP in February could be affected by “declines in exports, manufacturing and wholesale trade.” On the flip side, real estate and retail sales “should provide some positive offset.” (Source: Ibid.)
Statistics Canada is expected to release Canada’s real GDP for February this Friday, April 29. If things turn out to be worse than expected, the upward trend in the CAD/USD pair could come to an abrupt halt.
Will international trade help the CAD/USD? Well, according to Stephen Poloz, the governor of the Bank of Canada, “If global trade has reached a new balance point, we should not fret that global export growth hasn’t recovered to pre-crisis levels.” (Source: “Slowing Global Trade Growth Signals New Balance point, Governor Poloz Says,” Bank of Canada, April 26, 2016.)
In particular, Poloz pointed out that “the most important structural factor behind the slowdown in trade growth is that the big opportunities for increased international integration have been largely exploited.” At the end of the day, he notes, “China can join the WTO only once.” (Source: Ibid.)
So, international trade might have reached a new balance point, but that doesn’t change the fact that the U.S. managed to increase its exports by $1.8 billion to $178.1 billion in February. (Source: “U.S. International Trade in Goods and Services February 2016,” Bureau of Economic Analysis, April 5, 2016.)
Due to the low prices of energy products, Canada’s total exports fell by 5.3% in February. In particular, exports to the U.S. fell 5.6% to $33.1 billion. (Source: “Canadian International Merchandise Trade, February 2016,” Statistics Canada, April 5, 2016.)
International trade plays a significant role in the currency market. When you buy something from another country, the foreign seller could demand payments in their currency. This worked out great for the Canadian dollar as strong oil prices sent the CAD USD exchange rate above par in 2011. Now, things are quite different.
If you look at what Canada’s exports are made of, the downturn won’t really be a surprise. Oil is Canada’s No. 1 export, with the country shipping out $77.8 billion worth of it during 2015. As oil prices got slashed since the summer of 2014, so did the loonie. (Source: “Canada’s Top 10 Exports,” World’s Top Exports, February 11, 2016.)
The force is particularly strong on the CAD to USD exchange rate. When oil prices decline, buyers don’t need to pay as much to buy the same amount of oil. With Canada exporting 3.4 million barrels of crude oil to the U.S. per day, no wonder the CAD/USD pair got killed. (Source: “Company Level Imports,” U.S. Energy Information Administration, April 4, 2016.)
The Bottom Line on the CAD to USD Exchange Rate
Oil prices have started bouncing back, but remember this: for a commodity’s price to go from $100.00 to $30.00, it takes a 70% drop; for the price to go from $30.00 back to $100.00, it would need a 233% gain.
Unless something more meaningful happens in the oil market, it would be difficult for the CAD/USD pair to find more upside.