Canada: Canadian dollar hits eleven-year low in December
December 18, 2015
On 17 December, the Canadian dollar (CAD) closed at an over-eleven-year low, weakening to 1.39 CAD per USD and taking the dollar to its lowest value since May 2004. The CAD has registered a 4.6% monthly drop and a 19.8% yearly decline. This is the latest in a series of over-ten-year records being broken by the CAD as it has continued to fall in value against the USD consistently since May this year.
Like many of the world’s currencies, the CAD is losing value against the USD thanks in part to the Fed’s decision to gradually increase interest rates. This has pulled liquidity away from a number of emerging and advanced economies into the U.S. and decreased the value of corresponding currencies. Furthermore, the CAD and prices for energy are strongly linked, and the cessation of the oil boom of the past decade has been felt across oil-exporting countries around the world. Oil prices sank below the USD 11 a barrel mark in December and still haven’t hit the floor. The release of U.S. crude inventory data in mid-December, indicating a larger-than-expected crude stockpile, did not help matters. These factors have contributed to an overall outflow of capital from Canada, reducing demand for the CAD. Indeed, in Q3 2016, Statistics Canada recorded the first reduction in the holdings of Canadian securities since 2008.
The downward pressure on the Canadian dollar from these factors is not likely to abate any time soon. OPEC has reaffirmed its strategy of pumping oil at near-capacity levels in order to drive out higher cost competitors, while demand is slowing in other parts of the world. Resource-hungry China, as well as other emerging markets, no longer have the appetite they once did for the wide variety of Canadian products. Moreover, recent high-frequency data for Canadian GDP point to a slowdown in the economy. Considering that Canada spent the first half of the year in a recession, this will do little to reassure investors of the resilience of the Canadian economy, and could force the Bank of Canada to ease policy further against the backdrop of a nascent tightening cycle in the U.S.
The low value of the CAD will eventually offer Canadian firms a competitive edge, and this should translate into some added business investment if companies believe that this advantage will last. Some pass-through from the weak CAD seems to already have impacted Canadian exports, as growth in exporting businesses was an integral part of Q3’s increase in GDP. However, it remains to be seen how much of an impact the weak currency will have on the economy.
Author: Robert Hill, Economist