By Gaurav S. Iyer, IFC Published : January 31, 2016
A Little Hope for the CAD to USD?
Is there any hope for a recovery in the Canadian dollar?
Well, as unsatisfying as it seems, the fate of the CAD to USD has been tied to several other questions. Only by answering all of them can we figure out how to make huge returns off the sinking Canadian economy.
I know most people like to get a quick recommendation and be on their way. Those articles won’t help you make money. They only seem credible because of all the numbers, but don’t trust a writer who can’t make his case in plain English.
Too heavy a reliance on numbers is usually a telltale sign of either ignorance or dishonesty. If you want to make a smart trade, then listen up. All that’s necessary is a simple trail of logic.
Let me explain…
Mapping out the Canadian Dollar Forecast
A lot of people say that fiat money is tied to nothing, but that’s not true. A currency is valued on the strength (or weakness) of its underlying economy.
Demand for a currency increases when the economy is expanding. The reverse happens when an economy is in decline. Think about it like this: when people buy fewer things, investment dries up, and money is sucked out of the economy.
If there’s no business to be done in a country, no one wants its currency. You don’t have to make a blind forex trade off some technical analysis. Just look at the economy.
Canada has generally performed well since the financial crisis. Crude oil was selling at $100.00 a barrel and resources made up more than 50% of Canadian exports. Both the currency and the economy were in great shape.
At one point, the CAD to USD actually topped $1.00, meaning the Canadian dollar had actually become more expensive than the U.S. dollar. But then oil prices cratered in 2014 and they’ve been in a steady decline ever since.
Last week, the price of oil plunged to $28.00 a barrel. The slump hit Canada’s oil patch with full force, costing thousands of people their jobs.
This is the only number that matters.
Unemployment rose and economic output shrank. Canada fell into recession early in the year before a slight recovery in the third quarter. But that was a temporary reprieve from the storm.
The United States is currently unwinding its sanctions against Iran. This means Iranian oil will soon rejoin the global supply. Crude prices are already depressed. Adding more will just make the problem worse.
And if oil prices are doomed, so is the Canadian dollar forecast.
CAD to USD Forecast for 2016
The logic is clear. High oil prices led the Canadian economy into a boom period. Everyone saw the sensitivity to resource markets, but who cares, right? Everyone was getting rich, so why spoil the fun?
Oh, right, because then energy prices collapsed and the economy followed suit. It may have been terrible, but no one can say it wasn’t predictable. Markets turned a blind eye.
Now only one question remains: will oil prices recover? Since none of the major players—from OPEC to Russia to the U.S.—are cutting back output, I don’t know how that’s possible.
Supply is growing. Demand is shrinking. There’s no hope for the Canadian dollar in 2016.
Run as fast as you can.