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The Canadian Economy is Ensnared by Falling Oil Prices

The Canadian Economy is Ensnared by Falling Oil Prices

Fundamental Forecast for CAD: Bearish

  • USD/CAD set a new 11-year high after upbeat US Jobless Claims and Durable Goods.
  • The Norges Bank of Norway announced a surprise interest rate cut along with a warning that looser monetary policy may be instituted in the future to offset weakness brought on by falling oil prices.
  • For up-to-date and real-time analysis on the CAD, Oil and market reactions to economic factors currently taking place, DailyFX on Demand can help.

The Canadian Dollar set a new 11-year low against the greenback this week as rate-hike bets for the United States improved on the back of better-than-expected jobless claims and durable goods orders; furthering the dichotomy between the American and Canadian economies as Canada may be nearing even looser monetary policy while the Federal Reserve walks towards the first rate hike in the US in over nine years.

The apparent driver in the Canadian Dollar this week was yet another impact of falling oil prices, as the Norwegian Central Bank announced a surprise interest rate cut along with a warning that further monetary easing may be necessary. Norway, like Canada, is a large Oil exporter that has become ensnared with the precipitous drop of falling oil prices. As Norway looked to ease policy to offset the weakness brought into their economy by such a massive price drop in a key export, investors began to look for Canada to move in the same direction in the future. The immediate move in the Canadian Dollar was aggressive, as USD/CAD shot up to a new 11-year high shortly after this announcement from the Norges Bank.

So, the bigger question for the Canadian economy right now is the price of oil, as continued weakness in oil prices will likely spell continued weakness for commodity-heavy economies like Norway and Canada; and will likely lead to the necessity of even looser monetary policy and lower interest rates, which can then, of course, lead to weakness in the currency. Longer-term, this could be a good thing for the Canadian economy, of which consumer spending has been the driving engine behind growth over the past five years. As the Canadian economy has slowed with falling oil prices and consumers have spent less briskly, hopes have shifted to export growth on the back of a weaker Canadian Dollar.

July GDP numbers are released for Canada on Wednesday, and in this report we’ll see how much the continued slowdown in oil has impacted Canadian economic growth. Earlier in September, 2nd quarter GDP data showed the second consecutive quarter of negative growth, putting the economy in a ‘technical recession’ marked by two consecutive quarters of declining GDP growth. But even with this disappointing print, there was hope for a return to growth, as the final month of the quarter, June, had shown an encouraging uptick in economic activity.

But July was a tough month for Oil as the commodity slid by more than 20%. The pain may not yet be over for the Canadian economy, and the Canadian Dollar. As oil finds a bottom, or as Canadian exports begin to offset the slowdown in consumer spending, the long side of the Canadian dollar may start to become more attractive; but for the situation that we have now, a bearish stance is warranted until something material changes.

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.