Jan. 18 saw the Canadian dollar continue to plummet as it nearly reached the 68-cent mark (68.22 to be specific) before stabilizing at 69-cents; which is indicative of another day of sub-par economic growth in Canada’s failing economic landscape.
According to various reports on the subject, the Canadian dollar was free-falling in part due to the declining value of oil. Furthermore, the lifting of various sanctions on Iran by the European Union and the U.S.A has helped flood the market with cheaper oil, which evidently helped further drive down the Loonie.
“Iran is officially ready to swamp an already oversupplied oil market,” said London Capital Group analyst Ipek Ozkardeskaya in an interview with CBC.
“Below $30/barrel, Canada is well behind the curve,” Ozkardeskaya said. “The field is now left to the most cost-efficient players, led by Saudi Arabia and Iran, and there is little Canada could do about what is happening right now,” Ozkardeskaya further added.
“A further slide to $25/barrel is not a delusion but with many pundits in a race to predict more dramatic declines and the fact that this oil price demise is firmly in the mainstream media, we cannot rule out a volatile short squeeze higher,” she added.
Shifting away from the micro-economic focus on oil production and the waning international oil market itself, Canada’s dollar right now is quite literally in the hands of the Bank of Canada (BoC). Multiple news sources, such as CBC and The Globe and Mail, report that the BoC is considering cutting its benchmark rate (the process of comparing one’s business processes and performance metrics to industry bests or best practices from other companies) to just 0.25 per cent.
If this cut to the benchmark does indeed occur, it is very likely that the Loonie will fall even further with analysts predicting a drop to the low 60’s and a few even suggesting it could hit 59-cents sometime in 2016.
When asked about the role of the Bank of Canada, Ozkardeskaya further stated that, “The BoC could only lend some support to smoothen the economic contraction and the divergent BoC/Fed monetary outlook paves the way for a further slide to the 0.65 mark.”
Where the dollar is heading
According to David Doyle from Macquarie Capital Markets Canada Ltd, his personal forecast for the Canadian dollar is not very good, suggesting that the dollar would hit 59 cents US some time in 2016.
This would literally be the lowest the Loonie has dropped ever, with the largest fall occurring on Jan. 21, 2002, when it reached 61.79 cents US.
Further solidifying Doyle’s reputation as an economist of credibility, last February when the dollar was valued at just over 80 cents, he correctly predicted that the Loonie would drop as low as 69 cents sometime within the next 12 months (a point that is verified by our current economic woes).
According to Doyle in an interview with The Globe and Mail, “Once the Loonie reaches this level it should remain subdued through the end of 2018 and potentially even longer.”
“The rapid weakness in the Loonie means that Canada should experience comparably elevated inflationary pressures relative to the United States over the next 12 months,” Doyle said.
Ultimately, Doyle’s forecast would suggest that the Loonie will not rise above 65 cents any time within the next 3 years, ultimately suggesting economic hardship in the near future for the once booming Canadian economy.
To exacerbate the situation, the American dollar, which comparably is doing much better than our own, is making it virtually impossible for over-seas or North American investors to consider Canada as a viable option for long term growth. Perhaps this was evident as early as the infamous Target closures in Canada last year.
According to David Madani from Capital Economics, the Bank of Canada is most likely going to cut its key rate by a quarter of a percentage point next week, further suggesting that the Canadian Economy has contracted in the final quarter of the last fiscal year.
“Not only this, the further plunge in commodity prices — led by oil — over the past month or so has completely undermined prospects for economic growth this year,” he said.
Weighing in on the issue, TD chief economist Beata Caranci made a statement supporting the rate cut by the Bank of Canada.
“If the Bank [of Canada] decides to stand pat to observe the degree to which recent economic weakness is transitory in nature, the focus will turn to the forecasts within the monetary policy report, and a rate cut down the road remains entirely plausible,” Caranci said in an interview with the Globe and Mail.
So what should we expect as a Canadian consumer?
In the early 2000’s, a cheap Canadian dollar was often a double-edged sword with Canada seeing a rise in exporting, but a sharp decline in imports; as well as a weakened dollar making it that much more difficult for Canadians to travel abroad.
Regardless of the benefits, the detriment of a low-valued dollar cannot be overlooked, a point verified by Bank of Montreal economist Doug Porter, who stated in correspondence with the Globe and Mail, that, across the board , Canadian “Consumers benefit, a tad, from the drop in energy prices, but are no doubt hurt by the dollar’s slide. And, the blaring headlines about a sub-70 cent dollar are likely to hit confidence further.”