Canada’s biggest banks say the worst is to come for the Canadiandollar
Ari Altstedter, Bloomberg News|October 23, 2014 9:51 AM ET
The oil boom that powered Canada’s recovery from its 2009 recession is turning into a bust for the nation’s dollar.
Canada’s currency tumbled this month to a five-year low of C$1.1385 per U.S. dollar as the price of oil, the country’s biggest export, fell 30% from a June peak. Without a sustained increase in crude, the local dollar will weaken at least another 4% to C$1.18, according to Toronto-Dominion Bank and Royal Bank of Canada, the nation’s two biggest lenders.
“The risk is, a sustained push lower in oil prices cuts Canadian growth,” Shaun Osborne, the chief currency strategist at Toronto-Dominion, Canada’s largest bank, said by phone on Oct. 15. “Any sort of setback for growth and investment in the energy sector is likely to have a fairly significant knock-on effect for the rest of the economy.”
The slide in oil, caused by a combination of oversupply and falling global demand, is a setback for Canada. Since the recession, most new business investment and jobs have come from the oil-rich province of Alberta. The nation’s trade surplus turned into a deficit in August, and economic growth stalled the previous month.
Money managers are boosting bets the Canadian dollar will keep weakening. Hedge funds and other large speculators pushed net-bearish wagers on the currency to 16,167 contracts in the week ending Oct. 17, the most since June, according to the Commodity Futures Trading Commission in Washington. Investors held net-long positions as recently as Sept. 26.
Canada’s currency will depreciate to C$1.17 per U.S. dollar next year and may weaken to C$1.30 in the longer term as slower growth pushes up unemployment, according to Toronto-based Sprott Asset Management LP, which oversees $7.5 billion.
“We’re a commodity currency, so the currency gets crushed” as raw materials drop, Michael Craig, who manages fixed-income hedge funds at the company, said in an interview at Bloomberg’s Toronto office on Oct. 17. “It’s a pretty simple play book. You’re going to see an acceleration in the weakness of the Canadian dollar. It’s going to go a lot faster than people think.”
International Economics – The Balance of Payments and Exchange Rates
- Define the following terms indicated in bold in the text:
- Trade surplus
- Depreciate
- Using an appropriate diagram, explain the impact of lower oil prices on Canada’s balance of visible trade and on the exchange value of the Canadian dollar in the foreign exchange market.
- Using an appropriate diagram, explain how the actions of speculators and hedge fund managers may cause the value of the Canadian dollar to change more quickly than expected.
- Using information from the text and your knowledge of economics, evaluate the impact of the suggested change in the value of the Canadian dollar on the Canadian economy.