3 Factors Suggest CAD to USD Could Have Dire Outlook
The outlook for the CAD to USD exchange rate looks dire. There are three factors that suggest that the Canadian dollar collapse could happen in 2017.
The three things that investors need to pay attention to in order to predict where the CAD to USD exchange rate is heading next are the Bank of Canada, the U.S. economy, and oil prices.
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1. Interest Rates Remain Low in Canada but Are Increasing in the U.S.
You see, as it stands, it appears that the Bank of Canada is worried about growth and inflation.
Not too long ago, the governor of the Bank of Canada, Stephen Poloz said, “While we project that inflation will be sustainably at target around the middle of next year, we are well aware that the lingering aftermath of the crisis has left the Canadian economy with persistent excess capacity, and inflation has been in the lower half of our target range for some time.” (Source: “Bank of Canada’s economic forecasting can be improved, says Poloz,” BNN, January 31, 2017.)
Putting it in simple words: the Bank of Canada says inflation is lower than anticipated, and there are still holes in the Canadian economy.
What could happen? The Bank of Canada hasn’t explicitly said that it will lower its interest rates to improve inflation and growth in Canada, but it has made it clear that rates aren’t going up until at least 2018. So, interest rates remaining low could impact the direction of the CAD to USD exchange rate.
Understand this: when it comes to the relationship between two currencies, the currency from the jurisdiction with higher interest rates gets stronger while the currency from an economy with lower interest rates weakens. Currently, U.S. rates are increasing while Canadian rates are stalled, and could very well go down. This phenomenon alone makes the Canadian dollar a weaker currency in 2017.
2. U.S. Economy Excels While Canada’s Remains Subdued
The economic performance of countries matters a lot. With the new U.S. administration, there are hopes that the U.S. economy will perform much better than forecasted. We even see the U.S. Federal Reserve increasing its estimates. It now expects the U.S. economy to show growth of 2.1% in 2017. (Source: “Advance release of table 1 of the Summary of Economic Projections to be released with the FOMC minutes,” Board of Governors of the Federal Reserve System, last accessed February 24, 2017.)
Looking at the Canadian economy, it’s expected to grow by 1.9% in 2017, according to the International Monetary Fund (IMF). (Source: “A Shifting Global Economic Landscape,” International Monetary Fund, last accessed February 24, 2017.)
But keep in mind, these estimates could be revised lower later.
The Bank of Canada expects the Canadian economy to improve about two percent in 2017 as well, but it doesn’t have much confidence in it. The bank keeps on mentioning words like “risks” and “uncertainty” around it.
From an economic performance perspective, as well, the CAD to USD exchange rate seems to have a rough road ahead.
3. Oil Prices Critical for Projecting CAD to USD Direction
When trying to figure out the future of the CAD to USD exchange rate, it’s important to pay attention to oil prices as well. Why? Because the Canadian dollar has a high correlation with the oil sector. If the price of oil falls, the Canadian dollar falls.
With this, since late 2016, oil prices have seen a solid move to the upside. But, ask anyone in the know and they’ll say the upside isn’t much. If oil prices reach $60.00 per barrel, we could see a huge influx of supply. This could dampen oil prices again.
This is not good for the Canadian dollar.
CAD to USD Outlook: Canadian Dollar Setting Up to Disappoint
Truth be told, there isn’t a lot to that suggest that the CAD to USD exchange rate could rise going forward. All odds are lining up against the Canadian dollar.
In these pages, I have said before that the Canadian dollar could collapse to as low as 0.62 against the U.S. dollar. I still stick to that forecast. The fundamentals continue to suggest that it could happen much sooner than many anticipate.
