Where Is the Canadian Dollar Headed?
The Canadian dollar is currently in its longest period of decline since…the 1970s. The losses of the CAD to USD exchange rate are wreaking havoc across the Canadian economy, sparking fears of a full-blown recession in the “Great White North.”
Is there any way to reverse the slide? Steven Poloz, the governor of the Bank of Canada (BoC), is certainly going to try. By all accounts, he’s aiming to cut interest rates nearer to zero or even let them fall into negative territory.
Cutting interest rates is one of the tools central bankers have at their disposal, especially since the Federal Reserve used it to such great effect. The Fed drove the Dow Jones, S&P 500, and the NASDAQ to all-time highs, while also helping to slash the unemployment rate.
To put it really simply (maybe too simply), lower interest rates drop a currency’s value in the hopes of increasing that country’s exports. More exports mean more jobs, which should lead to an economy-wide recovery and, eventually, a stronger currency.
The logic may be roundabout, but it’s worked for the U.S. dollar. Can it also help the Canadian dollar? Let’s find out.
CAD to USD Forecast for 2016
When I say the Canadian dollar got decimated this year, there’s absolutely no hyperbole in that. We’ve seen a 21% decline in the CAD to USD exchange rate, leaving the loonie below $70.00 for the first time in a dozen years. (Source: “Canadian dollar dips below 70 cents U.S. for first time since April 2003,” Financial Post, January 12, 2016.)
The collapse is transparently related to a slump in oil prices, which suffered a 70% decline over the last 18 months. From more than $100.00 a barrel, WTI crude prices fell below $30.00, which also hasn’t happened for more than a decade.
Canada is an oil-exporting nation, so its currency got hammered. The pain has been far-reaching. My colleagues and I have personally received calls from family and friends who lost their jobs at Canadian oil companies.
Those cuts fed into a really bad narrative about the Canadian economy. Investors got scared out of their wits, and for good reason, considering the housing market in Alberta was showing signs of cracking. Alberta is the home of Canada’s oil fields. (Source: “Alberta housing market braces for most painful year since crisis,” The Globe & Mail, January 13, 2016.)
So would lower interest rates help solve these issues? I’m afraid it’s unlikely. More than half of Canada’s exports are in the natural resources sector, so exports won’t bounce back with a weaker CAD to USD exchange rate. Commodities need genuine recovery before exports can pick back up.
$0.59 Canadian Dollar?
If there was a failsafe market for Canadian investors to put their money in, one that was uncorrelated to energy and had room for expansion, I wouldn’t be so bearish on the Canadian dollar. But the only possible contender is the housing market.
And that bubble is primed for a crash. Canada has one of the most overheated housing markets in the world, yet it doesn’t have the economic growth to match. What do you think will happen when unemployment rises, wages start falling, and housing demand drops?
The Canadian dollar could plunge even further.
It’s not just me that thinks this is happening. According to the Macquarie analysts, the CAD to USD could drop to US$0.59. (Source: “Canadian dollar will drop to 59 cents US in 2016, Macquarie forecasts,” CBC, January 13, 2016.) I’ve been saying that for months, but that’s beside the point.
The point is that low interest rates won’t prevent a further collapse of the Canadian dollar.