Canadian Dollar Expected to Sink to Record Lows as Prospects for a Recession Grow

Canadian Dollar Headed to $0.62?

Many investors thought the Canadian dollar would stage a comeback in 2019. It’s starting to look like the opposite is true, with some analyst’s predicting the Loonie could slide to as low as $0.62 versus the U.S. dollar. There is a lot of merit to these calls. The Canadian economy is teetering on a recession, oil prices remain weak, Canadians are saddled with high personal debt, and housing prices are down. After a terrible fourth quarter, where the Loonie fell 5.7% against the greenback (closing the year at $0.7328), the Canadian dollar staged a comeback in 2019. Between the start of the year and February 1, the Loonie climbed 4.1% to $0.7332; its highest level since late October 2018. The prospects for a strong loonie have since been severely tarnished. In fact, even the conservative big banks are predicting the Canadian dollar could slide to a record low of $0.62. One big reason for this pessimism is the Canadian economy. Despite solid job growth (which has mainly come from Ontario), the Canadian economy is teetering on a recession. In the fourth quarter, Canadian gross domestic product (GDP) growth came in at a paltry 0.4%. Bay Street was looking for growth of between 0.08% and 1.2%. In the third quarter of 2018, GDP was 2.0%. Even that 0.4% GDP growth in the fourth quarter is rosy when you consider the Canadian economy contracted in December by 1.0%. It was the second consecutive month that GDP fell and the third tumble in four months.¹ What tripped up the Canadian economy? Consumer spending is slowing down; this is a bad sign since consumer spending accounts for close to 60% of the country’s GDP. Meanwhile, Canadian household debt is near record levels. During the fourth quarter of 2018, Canadian household debt reached a seasonally adjusted average of $1.79 for every dollar of disposable income. During the June to September period, that number stood at $1.78.² The average Canadian household uses a record 14.9% of its disposable income to cover its debt. A whopping 7.3% of Canadians’ income, the most in nine years, is being eaten up by interest charges. This points to a growing number of Canadians having to access their RRSPs, taking out a second mortgage, or selling access just to manage their debt. Housing prices nationwide fell in 2018 for the first time since 1990 and home sales across the country are expected to fall to a decade low in 2019.³ Oil prices remain depressed and new growth is being hindered by new export pipeline delays and provincial (Alberta) government production limits. All of this is expected to put a dent in the Canadian economy, which could send it into a recession. We won’t actually know we’re in a recession until well after the fact, since economic data comes out weeks or months later. If Canada does slip into a recession, that negative sentiment will put further pressure on investor sentiment, the Canadian dollar, and Canadian stocks. On that other hand, there are equities and investments that do well during a recession or economic weakness. The key is knowing which ones.

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1. “Gross domestic product, income and expenditure, fourth quarter 2018,” Statistics Canada, March 1, 2019; https://www150.statcan.gc.ca/n1/daily-quotidien/190301/dq190301a-eng.htm
2. “National balance sheet and financial flow accounts, fourth quarter 2018,” Statistics Canada, March 14, 2019; https://www150.statcan.gc.ca/n1/daily-quotidien/190314/dq190314a-eng.htm
3. “CREA Updates Resale Housing Market Forecast,” The Canadian Real Estate Association, December 17, 2018; https://www.crea.ca/news/crea-updates-resale-housing-market-forecast-4/

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