The Canadian Dollar was given a respite from this month’s relentless collapse when the central bank declined to cut its overnight lending rate today. But with crude oil prices plumbing new twelve year lows, it is an improvement that is unlikely to last.
The dollar or loonie had touched 1.4690 in European trading, its weakest against the U.S. Dollar in almost thirteen years just before the Bank of Canada elected to keep rate unchanged at 0.5 percent, a quarter point above its all-time low. The Canadian Dollar is colloquially called the loonie in reference to the waterfowl on its script.
The Bank of Canada has been reducing rates from 1.0 percent for a year. It began in January 2015 with a 0.25 percent decrease, followed by another in July. Markets are still pricing in a better than 50 percent chance of another 0.25 percent rate cut by April. The bank meets again on March 9th and April 13th,
Canada’s large oil and commodity sectors have been hard hit by the precipitous decline in crude prices and the overall drop in commodity prices. Crude is down 25 percent this year alone, falling below $27 dollar a barrel a today in New York for the first time since 2003.
The Bloomberg commodity index has been falling for more than two years and Wednesday’s low of 72.3365 set another all-time record in the twenty five year history of the index.
After the rate decision was announced at 10:00 am New York time, the dollar briefly gained about 150 points to 1.4492. The improvement was short-lived with the market returning to its starting point of 1.4641 within an hour. Rates tailed off in subsequent trading, with the loonie again strengthening to 1.4523 by early afternoon.
Canada had one of the world's better performing economies and currencies from 2010 through 2014 as oil prices, Canada's largest export, stayed above $80 a barrel. Canada’s GDP averaged 2.6 percent through the period, almost half a point better than the U.S. average of 2.1 percent.
The Bank of Canada had raised rate three times in 2010, one of the few developed nations to do so after the financial crisis, bringing rates to 1.0 percent by September of that year.
The prolonged period of expensive oil encouraged American shale oil development that, along with unrestrained OPEC production has created an oil glut which shows little sign of abating. When this availability was combined with the global economic slowdown, beginning in emerging market nations but now spreading to China, Japan, Europe and perhaps the United States, both sides of the supply and demand equation have fallen heavily on the price of crude.
Wednesday’s action marked the Canadian Dollar’s 14th straight daily decline. That is the longest fall for the currency since the country ended its peg to the U.S. Dollar in 1971.
Chief Market Strategist
WorldWideMarkets Online Trading