The once high-flying Canadian dollar has been trading lower against the U.S. dollar since the beginning of 2013. But the disparity has increased in light of falling crude prices, a weakening Canadian economy, and a strengthening U.S. economy.
Canadian Dollar Falling Fast Against the U.S. Dollar
During the depths of the Great Recession, the U.S. dollar fell sharply against the Canadian dollar. In 2007, before the U.S. housing and credit crisis popped, one Canadian dollar was worth $0.93 U.S. By 2011, when the U.S. economy was still struggling, one Canadian dollar was worth $1.01 U.S. Between 2007 and 2011, the value of the Canadian dollar increased by 8.6%.
But all of that has changed. Today, one Canadian dollar will get you $0.79 U.S. That reversal of fortune has seen the Canadian dollar fall almost 22% against the U.S. dollar over the last few years. It has been even more pronounced since the beginning of 2015; over the last 10 months, the Canadian dollar has fallen 10.75% against the greenback.
But why has the Canadian dollar fallen so much against the U.S. dollar? It’s all about economics. The Canadian economy is struggling while the world’s biggest economy is strengthening.
Oil Prices Hurt Canadian Dollar
Between July 2014 and the end of October 2014, oil prices dropped more than 22% from $105 per barrel to $81 per barrel. The drop in oil prices came as a result of increased supply amid a weakening global economy.
Oil prices got hammered in late November after OPEC (Organization of the Petroleum Exporting Countries), sensing it was losing ground to the U.S. oil industry, announced it would not reduce its output. Since then oil has fallen even further; currently hovering around $47.00 per barrel, oil prices have plunged more than 55%.
Oil and gas is vital to Canadian economic growth. In Canada, crude oil accounts for about 14% of exports and is one of the biggest contributors to the country’s GDP. In 2010, the energy, mining, and forestry sectors generated new capital investment of $95 billion and total exports of $200 billion.1
As a result, sustained lower oil prices will negatively impact Canada’s chances for economic growth. Investors might be looking for oil prices to rebound, but by the looks of it, it could be years and years before oil returns to $100 U.S. per barrel.
Cheap oil prices will continue to underpin the Canadian dollar. Since July 2014, when oil prices started to slide, the Canadian dollar had fallen 17% relative to the U.S. dollar from $0.93 to $0.77.
Keep in mind, the lower Canadian dollar makes the cost of business more expensive. The U.S. dollar is the world’s reserve currency; that means, in most instances, countries buy and sell goods in U.S. dollars. To do that, you have to buy U.S. dollars. That’s an expensive purchase when your own dollar is worth so much less.
U.S. Economy Getting Stronger
The Canadian dollar is not just falling against the U.S. dollar because of weak oil and gas prices. It’s also falling because the U.S. economy is getting stronger. At the same time, the overall Canadian economy is showing signs of growing weakness.
The International Monetary Fund (IMF) downgraded its forecast for the Canadian economy by half a percentage point to just 1.0% this year. In 2016, it forecast growth for the Canadian economy to be 1.7%.2
The IMF lowered Canada’s economic outlook based on weak oil prices and lower capital expenditures in the oil sector.
The U.S. economy, on the other hand, is showing signs of sustained growth. In 2015, the U.S. economy is forecast to grow 2.6%, up from a July forecast of 2.5%. In 2016, the U.S. economy is expected to advance 2.8%.
Growing momentum for the U.S. economy and weakening demand for the Canadian economy is putting even more pressure on the Canadian dollar, and will continue to do so.
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- “Oil and gas vitality is key to Canada’s economic success,” The Globe and Mail website; https://www.theglobeandmail.com/report-on-business/industry-news/energy-and-resources/oil-and-gas-vitality-is-key-to-canadas-economic-success/article8780664/.
- World Economic Outlook 2015, International Monetary Fund website; https://www.imf.org/external/pubs/ft/weo/2015/02/pdf/text.pdf.