Canadian Dollar at Six-Year Low vs. U.S. Dollar
Times have certainly changed for the Canadian dollar. When the U.S. was in the depths of the Great Recession and domestic growth was near-death, the Canadian dollar was trading at around $1.10 U.S., meaning that one Canadian dollar bought you $1.10 U.S.
That was then, this is now. Thanks to an improving U.S. economy, weak Canadian economic data, and plunging oil prices, the Canadian dollar is tanking against the U.S. dollar; in fact, the Canadian dollar is at its lowest level since March 2009. Today, with one Canadian dollar, you could buy roughly $0.78 U.S.
The renewed strength of the U.S. dollar is a result of improving jobs data; specifically, February unemployment fell to a six-year low of 5.5%. U.S. employers added 295,000 jobs in February, the 12th straight month that the economy added more than 200,000 jobs.
The U.S. stock market is also trading at record highs. The S&P 500 continues to trade above 2,000, the Dow Jones Industrial Average is above 17,750, and the tech-heavy NASDAQ and the NYSE are also trading at record levels.
Oil Prices and Weak Economic Data Hinder Canadian Dollar
This is in sharp contrast to what is happening in Canada. The Canadian dollar has weakened significantly against the U.S. on the heels of plunging oil prices. In fact, both crude oil and the Canadian dollar are at the lowest levels in six-years.
The value of the Canadian dollar is highly correlated to the price of crude oil. That’s because crude oil accounts for 14% of the country’s exports and three percent of total economic output.
The Canadian dollar and oil have both been in freefall since July 2014. Since the beginning of July, crude oil prices have fallen 60% from $105.00 per barrel to $42.00 per barrel. Over the same time frame, the Canadian dollar has fallen against the U.S. dollar from $0.94 last July to $0.78 in March, a decline of 17%.
Oil prices have been slumping on the heels of increased supply and minimal demand. In fact, oil futures remain near $42.00 after government data showed U.S. crude oil inventories rose for the 10th straight week to record levels. For the week ended March 13, total crude oil inventory stood at a record 458.5 million barrels.
Pounded by the drop in oil prices, the Organization for Economic Co-operation and Development (OECD) cut its outlook for Canada’s growth this year to 2.2%, down from its November forecast of 2.6%. For 2016, growth has fallen from 2.4% to 2.1%.
To counter the effects of falling oil prices, the Bank of Canada lowered its benchmark interest rates from one percent, where it has been pegged since September 2010, to 0.75% in January. If oil prices continue to negatively impact the Canadian economy, there is a good chance the Bank of Canada could lower its rates even further in the coming months.
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At a time when the U.S. economy is improving and the Federal Reserve is hinting at raising its key lending rate, the Canadian economy is grinding down and the Bank of Canada is thinking of lowering its rate even further.
All of this points to an underperforming Canadian dollar. But how far will the loonie fall? And how can investors take advantage of the falling loonie? While buying stocks is one of the most obvious ways to invest on Wall Street, there’s more to the financial markets than stocks.
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“The Employment Situation – February 2015,” U.S. Bureau of Labor Statistics web site, March 6, 2015; https://www.bls.gov/news.release/empsit.nr0.htm.
“Summary of Weekly Petroleum Data for the Week Ending March 13, 2015,” U.S. Energy Information Administration web site, March 18, 2015; https://ir.eia.gov/wpsr/wpsrsummary.pdf.
“Low oil prices and monetary easing triggering modest acceleration of global recovery,” Organisation for Economic Co-operation and Development web site, March 18, 2015; https://www.oecd.org/economy/low-oil-prices-and-monetary-easing-triggering-modest-acceleration-of-global-recovery.htm.