The Canadian dollar has been under pressure against the U.S. dollar on growing concerns about the impact low oil prices and an oil glut will have on the broader economy. There are also mounting concerns about the broader Canadian economy stalling while the U.S. economy continues to show signs of sustainable growth.
Loonie Feels Pressure as Canadian Economy Stumbles
From May 2015 to January 2016, the Canadian dollar fell 18% versus the U.S. dollar, from around $0.83 to $0.68—the lowest level since 2003. The loonie tumbled on growing concerns about the broader economy and lower oil and gas prices.
That said, the Canadian dollar rallied over recent months as fears about a global recession eased and oil prices climbed. From the middle of January to early May, the Canadian dollar climbed 18%, hitting a high of around $0.80, with some analysts calling for the Canadian dollar to top $0.85 versus the U.S. dollar.
But that didn’t happen. While stable, the loonie has stalled at around $0.77 versus the greenback. Solid economic data out of the U.S. and less than encouraging data out of Canada has been putting pressure on the loonie.
Canadian wholesale trade rose just 0.1% in April, far less than the expected 0.5% increase.1 This was just the latest sign that the Canadian economy remains weak. And it isn’t expected to rebound until at least the third quarter.
In the first quarter, the Canadian economy advanced 2.5%, which on the surface sounds great. But the economy contracted by 0.2% in March and 0.1% in February. The weak end to the first quarter is mostly attributed to the resource sector.2
This also raises concerns about the second quarter. For the Canadian dollar to rebound against the U.S dollar, there needs to be growth. But where is that growth going to come from? Oil prices are hovering around $50 per barrel, but will that be enough?
By comparison, the U.S. economy is making one of the strongest comebacks in the developed world. The country’s economic output is 10% above the pre-financial crisis peak, U.S. hiring remains solid, wages are inching higher, and inflation is down.3
CAD to USD Exchange Rate to Fall
Keep in mind, a rising CAD to USD exchange rate is not good for the Canadian economy. If the loonie rises against the U.S. dollar, Canadian exports to the U.S. become more expensive. And the U.S. is Canada’s biggest trading partner.
As the Canadian economy continues to follow in the shadows of the U.S. economy, the Bank of Canada may continue to keep interest rates near record-low levels, or even lower them further. This will lower the value of the Canadian dollar even further.
At the same time, the U.S. Federal Reserve has made it clear that a hike in interest rates is coming. This raises the value of the U.S. dollar. A weak Canadian economy, strengthening U.S. economy, and falling commodity prices will drive the Canadian-to-U.S.-dollar exchange rate lower.
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- “Wholesale Trade, April 2016,” statscan.gc.ca, June 20, 2016; https://www.statcan.gc.ca/daily-quotidien/160620/dq160620a-eng.htm.
- “Canada’s First-Quarter Growth Falls Short of Expectations,” wsj.com, May 31, 2016; https://www.wsj.com/articles/canada-gdp-expands-2-4-in-first-quarter-on-exports-1464699627.
- “OECD Economy Survey, United States June 2016,” oecd.org, June 2016; https://www.oecd.org/eco/surveys/United-States-2016-overview.pdf.
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