More Evidence that USD to CAD Could Go as Low as $0.65 in 2017
The Canadian dollar slipped further last Friday. The USD to CAD fell below $0.74, fueling predictions that it could fall to $0.65 in 2017. This potential exists because Statistics Canada said the Canadian economy contracted by 0.3% in October.
This is the first time in the past five months that gross domestic product (GDP) dropped. The CAD to USD was US$0.7376 on Friday morning. The lower GDP and lower value of the Canadian dollar—the “Loonie”—suggest a pessimistic trend. Should Donald Trump follow through on his electoral promises, the loonie’s slide to $0.65 could happen early in 2017.
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This is because a falling USD to CAD rate should have helped Canada’s manufacturing sector. Canadian goods should have become more competitive. But, this does not appear to have happened.
Canadian manufacturing dropped two percent in October. It had not dropped by that much since December 2013 according to Statistics Canada. Manufacturing of machinery and metal goods suffered the biggest drop. But manufacturing of the entire range of goods, durable and non-durable, was also down.
While many economists have downplayed the meaning of the manufacturing decline, there is reason for concern. Canadian manufacturing has dropped just ahead of the adoption of carbon taxes.
This is especially the case in the USD to CAD context. Trump, who will take over the presidency in January, wants to lower corporate and personal taxes. He has also taken a strong stance against the adoption of new fiscal tools like the carbon tax.
Canada has no plans to lower corporate or personal income taxes. Just as Trump takes office, Prime Minister Justin Trudeau (the world’s most famous snowflake) will bring in the carbon tax. At a Federal level, the carbon tax will be enforced in 2018. But, many key provinces, like Ontario and Alberta, will “enjoy” it starting in 2017.
This will raise the cost of energy production and delivery, meaning everything will go up in price. Jobs could move elsewhere—the U.S. included—hurting the overall economy. (Source: “Canadian jobs are at risk of flocking south under Trump,” Toronto Sun, November 12, 2016.)
The carbon tax has cast a shadow over the whole Canadian economy. This uncertainty may already be producing effects. In times of uncertainty, especially the kind that swing toward pessimism, the Bank of Canada has neither the inclination nor the political blessing to raise the key interest rate.
The USD to CAD going below $0.74 is just the beginning. Meanwhile, the U.S. Federal Reserve will want to raise rates to stave off the expected “Trumpnomics” inflation. The Loonie will be left in the middle of this monetary policy tug-of-war, with only one direction to go: down.
