The Canadian dollar has reversed the gains it made against the U.S. dollar in the first half of the year. The Canadian dollar performed well in the opening quarters of 2023, climbing 3.6% against the U.S. dollar.
The loonie was actually the best performing major G-10 currency in June after rising 2.4%. That momentum carried into July, with the Canadian dollar surging an additional 1.2% to $1.32 (CAD/USD 0.7638) in mid-July. The loonie rallied on strong inflationary data that showed Canada’s headline inflation advanced to 3.3% in July from 2.8% in June.
It’s been a different story since then, though. On November 1, the Canadian dollar hit an intra-day low of $0.7195. That’s down 5.7% from July’s high of $0.7638. It has rebounded a little, changing hands at USD $0.7251.
Why Is the Loonie Taking Such a Big Hit Against Its U.S. Counterpart?
For starters, the Canadian dollar is facing headwinds from a hawkish U.S. Federal Reserve and tumbling oil prices. The same factors are also pummeling the Australian and New Zealand dollars.
West Texas Intermediate prices have been in free-fall since the start of November, down more than 9.5% at around $75.30 per barrel. West Texas Intermediate has actually lost more than 19% since peaking in the opening days of the Hamas attack on Israel on October 7.
Why are oil prices down? There are concerns that U.S. interest rates will remain higher for longer, which could hinder a global recovery. Trade data from China that showed a big drop in imports also suggests the world’s second largest economy is stalling which would mean less demand for oil.
On top of that, the American Petroleum Institute announced that U.S. crude inventories gushed by 11 million barrels in the week ending November 3.
Oil and gas is a major driver of the Canadian economy, accounting for 7.5% of national GDP and there is a high correlation between the Canadian and U.S. dollars and price of oil. When the price of oil rises, the Canadian dollar typically climbs in step to the U.S. dollar. And visa versa. When Canada sells oil to the U.S., it gets paid in U.S. dollars.
On the domestic front, the Canadian dollar took a hit after the Canadian Ivey Purchasing Manager Index (PMI), which measures economic activity as reported by purchasing managers across the country, showed economic activity expanded at a slower pace than in September.
The IVEY PMI index for October (non-seasonally adjusted) registered 51.9 compared with 54.2 in September. A reading above 50.0 shows the Canadian economy is in growth mode, but just barely.
What Is the Outlook for the Canadian Dollar?
While many hope the loonie will strengthen in the last quarter of the year, the outlook for the Canadian dollar now looks weaker than it did at the start of the year. A slowing economy points to a potential recession.
This comes at a time when the U.S. economy is ripping higher, reporting third quarter gross domestic product (GDP) growth of 4.9%. Early estimates point to the Canadian economy dipping into a contraction.
Because the Canadian economy is so dependent on the U.S. economy, the GDP growth of both countries tend to be quite similar. If these conditions deteriorate further, analysts believe the loonie could hit a low of USD $0.714, which is a full cent lower than where it is.
Learn-To-Trade.com, Canada’s Leader in Stock Market Trading Courses
Lower oil prices, geopolitical tensions, a weakening economy, and aggressive U.S. central bank are putting pressure on the Canadian dollar. Sustained headwinds could send the loonie down to its lowest levels since the 2020 pandemic. How will a weak Canadian dollar impact Bay Street and the country’s economy? Ask the trading professionals at Learn-To-Trade.com.
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