Canadian Dollar Rebounds but Economic Outlook is Dim

In January, fears of a global recession and weak oil and gas prices pushed the Canadian dollar down to US$0.68, its lowest level in 16 years. The Canadian dollar has rebounded and is currently trading near US$0.77. While some investors think the tides have turned for the Canadian dollar, the International Monetary Fund (IMF) cut its economic outlook, citing ongoing damage in the energy sector and a weak global economy. This does not bode well for the Canadian economy or dollar.

Canadian Dollar Crashes

In November 2007, the Canadian dollar was trading for as much as US$1.10. At the time, the U.S. economy was struggling, in fact, in 2007, the country’s GDP was just 1.8%, over the following two years, the country fell into a recession with 2008 GDP of -0.3% and in 2009 falling even lower to -2.8%.¹ Meanwhile, Canada remained relatively unscathed by the global recession. At least compared to the U.S. As a result, the Canadian dollar was at record levels. The tides began to turn though in 2013. The U.S. economy was getting stronger. At the same time, the global economy continued to stagnate. And the demand for oil and gas was subsiding. As a major exporter of oil and gas, this was not good for the Canadian dollar. At the start of 2013, the Canadian dollar was on par with the U.S. greenback. Over the next three years, the Canadian dollar continued to weaken against the stronger U.S. dollar. By January 2016, the Canadian dollar was trading for US$0.68—the last time the Canadian dollar was trading that low against the U.S. dollar was back in 2003. Many were speculating the Canadian dollar could crash to as low as US$0.60. That didn’t happen. In fact, the Canadian dollar has experienced a renaissance. Since mid-January, the Canadian dollar has rebounded around 14.50% and is currently hovering around US$0.77, the highest level since July 2015. The Canadian dollar is the top performer among developed nations over the last three months as the U.S. dollar weakened and the price of oil rebounded. Investors are also encouraged about a possible deal between Russia and Saudi Arabia to freeze oil output. Freezing output would help boost oil prices, which are still down sharply since hitting more than US$100 per barrel in 2014. But many see the recent strength of the Canadian dollar as being short-term and cyclical in nature, rooted in optimism around commodity prices; not sustainable long-term economic growth. If so, the recent momentum the Canadian dollar has enjoyed could be short lived.

Canadian Economy Downgraded Again

Despite the recent strength of the Canadian dollar, the IMF has grown more pessimistic about the Canadian economy. Citing ongoing weakness in the energy sector and concerns about the global economy, the agency cut its outlook for Canadian GDP growth to 1.5% in 2016, down from its 1.7% forecast announced in January. It also cut its outlook for the Canadian economy in 2017 to 1.9% from 2.1%.² This represents the sixth straight quarter in which the IMF has reduced its two-year economic outlook for Canada. Canada is not the only country with a glum economic outlook. The IMF downgraded global growth expectations for 2016 to 3.2% from 3.4% and 2017 to 3.5% from 3.6%. This is the fourth straight quarter that it has lowered its global economic outlook. Persistent, slow growth in Canada coupled with long-term weakness in commodity prices will continue to hurt the Canadian economy and Canadian dollar. Whether the Canadian dollar is strong or weak compared to the U.S. dollar, or any other currency, investors can profit.

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1. “GDP Growth (annual %), World Bank web site, April 13, 2016; https://data.worldbank.org/indicator/NY.GDP.MKTP.KD.ZG?page=1.
2. “Global Economy Faltering from Too Slow Growth for Too Long,” IMF web site, April 12, 2016; https://www.imf.org/external/pubs/ft/weo/2016/01/pdf/text.pdf.