Canada: Canadian dollar continues to break records in January
January 19, 2016
On 19 January, the Canadian dollar (CAD) closed at a 12-year low, weakening to 1.46 CAD per USD and marking its lowest value since early 2013. The CAD registered a 4.5% monthly drop and a 22.1% yearly decline. The surging value of the U.S. dollar has conflated with continually deteriorating commodity prices to drag the Canadian dollar down to historic lows. The resulting downward trajectory broke records in late 2015 and early 2016. Since 19 January, the CAD has recovered some ground and closed 27 January at 1.41 CAD per USD.
The monetary policy divergence between the U.S. Federal Reserve and several other major central banks, including Canada’s, has resulted in strong capital outflows from these economies, putting pressure on FX rates. Canada’s net foreign liabilities position, an indicator of investments held in Canadian dollars, fell over the course of 2015. This represents decreased demand for assets held in Canadian dollars. The contraction shows little sign of abating, as U.S. investment prospects continue to show signs of improving, pulling more money into U.S. markets. Furthermore, the CAD and prices for energy are strongly correlated, and recent volatility in energy markets has been reflected in the Canadian dollar’s value. Iran’s entry into global markets in early January and strong U.S. crude oil inventory data have dragged on oil prices, which has translated into downward pressure on the CAD. Oil prices rallied somewhat in late January, helping the CAD to regain some ground.
Global demand for most natural resources plummeted over the course of 2015 and since such commodities make up approximately 50% of Canadian exports, the impact on the Canadian economy, and consequently the Canadian dollar, has been striking. Analysts expect commodity prices to gradually recover, although they are not expected to reach price levels typical of the commodity super cycle that characterized the past 10 years. This means that pressure on the Canadian dollar is not likely to abate any time soon. Domestically, data from Statistics Canada indicates that non-resource exports have been struggling as well, suggesting that a recovery in the dollar based on exports is not just around the corner. This will do little to reassure investors of the resilience of the Canadian economy.
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. The pass-through from the weak dollar that may have been responsible for Q3’s strong export growth appears to have faded in more recent monthly data.
Author: Robert Hill, Economist