Low Oil Prices Could Hammer Canadian Dollar
Low oil prices have ravaged the Canadian economy, hammering the Canadian dollar and the CAD/USD exchange rate. But according to the most recent survey of the Canadian dollar forecast for 2016 by Reuters, this might only be the beginning.
According to a poll conducted this week of more than 40 currency strategists, the CAD/USD exchange rate could plunge even further than analysts were expecting just a few months ago. The Canadian dollar exchange rate has lost more than 25% of its value over the past year versus the U.S. dollar, closing the previous trading session at $0.75. However, the most recent poll predicted the Canadian dollar, dubbed the “loonie,” will depreciate further to $0.74 in three months and maintain the same level in six months. (Source: “Canadian dollar to weaken further on monetary path split, low oil prices: poll,” Reuters, December 2, 2015.)
Morgan Stanley is the most pessimistic. Analysts at the investment bank see the CAD/USD exchange rate falling to $0.69 over the next 12 months, representing a drop of more than eight percent.
The Canadian dollar is basically a commodity story. Low energy prices combined with a sluggish economy have put any interest rate hikes on hold for the foreseeable future. Combined with the fact that the U.S. recovery is picking up momentum, investors are fleeing the so-called Great White North for better investment opportunities elsewhere.
Unfortunately, a weak dollar is doing little to prop up the nation’s economy. According to a recent report by JPMorgan Securities, Canada’s dollar has actually lost competitiveness against other currencies, including Japan’s yen and the eurozone’s euro. The country’s manufacturing sector, which many expected to benefit from a weak currency, is still uncompetitive against rivals, thanks to soaring electricity costs and higher tax rates. (Source: “The loonie still isn’t weak enough to help Canada’s economy: J.P. Morgan,” National Post, November 30, 2015.)
All of which means the CAD/USD exchange rate may have to fall further. Bank of Canada (BoC) Governor Stephen Poloz is hoping a weaker currency will rebalance the country’s economy away from energy exports to manufacturing and other industries. However, the report from JPMorgan suggests the pain for Canada will be far deeper and last far longer than most expect.
Canadian dollar bulls shouldn’t expect relief anytime soon. On Friday, Statistics Canada reported the nation’s economy shed a jaw-dropping 35,700 jobs in November. The unemployment rate rose to 7.1%, up from an even seven percent in October. (Source: “Labour Force Survey November 2015,” Statistics Canada, December 4, 2015.)
All of this kicks any interest rate hikes from the BoC further down the road.