CAD victim to commodities blow-out – more pain to come
On Wednesday Stephen Poloz the governor of the Bank of Canada put the currency markets on a alert that there is likely to be further weakness in the CAD versus USD saying Canada's Q1 GDP numbers will look attrocious.
He further went onto warn that the BoC could go beyond interest rate cuts – it surprised the market with one in January – and hinted at the possible deployment of quantitative easing. That would see Canada joining the Eurozone, Japan and Sweden. The former two, especially, have seen their currencies devalue substantially, QE would likely do the same for CAD.
The bout of weakness in Canada's economy has been triggered by the rout in prices of many of the major commodity groups including oil. Poloz worries that the fall in oil prices will hurt investment and see workers laid off, which will stunt any benefits of lower prices on domestic consumption.
USD/CAD – likely to revisit levels seen a decade ago
It's not all gloomy for Canada
A short-term hit to Canada's economy is certainly likely given the speed at which oil prices have declined, which is creating a shock to country's natural resources sector. However, Canada is less reliant on commodities than say Norway or Australia and is likely to see other sectors of the economy pick up the slack, which Poloz partially acknowledged.
For starters, natural resources account for only around 15% of its GDP. And while that sector is suffering, manufacturing will likely pick-up in the coming months. Also, Canada's economy has become increasingly driven by domestic consumption as is the case with most modern economies.
The other big benefit is that Canada's major trading partner – the US – is growing nicely and a weaker CAD as Poloz suggested will be good for exports.
Canada is therefore likely to go through a period of internal readjustement with natural resources giving ground to newly invigorated sectors such as manufacturing, technology and even domestic consumption. While this adjustment takes place there is some risk of QE being deployed, but given the strength of the US economy, it may not be necessary.
USD/CAD resistance at 1.2835 is likely to be successfully challenged with 1.3000 in the cross hairs – a level not seen in over a decade.
By Justin Pugsley, Markets Analyst, MahiFX