Even before 2020 dawned, things were looking shaky for the Canadian economy. The energy sector was languishing due to $50 oil and a lack of pipelines. In Central Canada and Alberta, government-imposed austerity was taking its toll on consumer activity.
And then, the Coronavirus reared its ugly head. In the space of a few days in March 2020, what little demand that existed for oil vanished. And, with Canadians quarantining in droves, the rest of the economy is set to take a nosedive.
It’s against this backdrop that we will chart the course ahead for the Canadian Dollar (CAD.) In today’s post, we’ll present our CAD FX forecast for 2020.
Demand for oil & gas will continue to be anemic
The CAD, despite being the currency of one of the wealthiest nations on Earth, is effectively a petrocurrency. While the economies of Central Canada and BC are decoupled from oil & gas, Alberta and Saskatchewan are dependent on it.
These resources also generate a great deal of federal tax revenue. In 2018, the Canadian government collected 340 million CAD in resource royalties. This figure is a fraction of what they earned ten years earlier when Ottawa raked in 2.76 billion CAD.
Back then, the price of WTI crude oil super-spiked to almost $150/barrel. These days, amidst the Coronavirus outbreak and the Russia-Saudi price war, it is languishing at about $30/barrel. Pending new data, the price may sink into the 20s.
This development is beyond disastrous for the Canadian oil industry. Nearly two-thirds of production comes from its tough-to-extract crude in the oil sands. According to industry figures, it costs about $45/barrel to produce a barrel of oil in 2019.
This number is down considerably from 2014 when that figure was in the 60s. But, with a sustained demand (Coronavirus) AND a supply (Russia-Saudi price war) shock, the price of oil will remain depressed through 2020.
Already, this state of affairs is having a marked effect on the Canadian dollar. On March 8, just before the oil price war began, the USD/CAD interbank rate sat at 1.34250. By March 13, USD/CAD shot up to 1.39702 – easily a 52-week high and this currency pairing’s highest spot price in four years.
Consumer spending will drop precipitously
However, it isn’t just oil that’s impacting the performance of the Canadian dollar. With widespread economic uncertainty sweeping the globe, every industry imaginable will take a hit. This downturn will impact travel & hospitality particularly hard. Already, WestJet has floated plans to layoff half its workforce.
On the whole, this Coronavirus situation is unprecedented in modern times. Experts say it may surpass the Global Financial Crisis in severity. After all, the collapse of banks didn’t close borders, cripple air travel, or test the viability of supply chains.
To get a hint of what may be coming, it helps to examine the economic impact of the 1918 Spanish Flu pandemic. Like the Coronavirus outbreak, this bug triggered lockdowns and closures the world over. With widespread disruptions, the economic damage was sharp yet short-lived.
Once the outbreaks subsided, pent-up demand led the economy to pick up where it left off pre-pandemic. Similarly, once the first wave of Coronavirus ends (and again, when researchers develop a vaccine), economic activity will make up for lost time.
In the interim, though, expect a hard drop in consumer spending to do its part in devaluing the CAD.
Volatility will be the name of the game
There is more at play than an oil price war and a pandemic. For the past four years, stock valuations have been inflating, especially in America. In Canada, real estate is still overvalued, thanks in large part to foreign buyers.
In short, markets are long overdue for a correction. Since the bottom of the last bear market, regulators, government, and speculators have been inflating its value. It just so happens the one-two punch of the oil price war and Coronavirus set the sell-off in motion.
Over the next year or so, a mix of grave economic news will send markets sharply lower. Countermeasures, like economic stimulus packages and interest rate cuts, will send them sharply higher.
The value of the Canadian dollar will follow in kind. Expect bad economic data, like oil prices in the 20s or higher unemployment to send CAD/USD rates lower. Factors like stimulus packages, industry bailouts, and economic reports that show the release of pent-up demand will do the opposite.
Either way, gyrations in CAD/USD or USD/CAD, usually a stable currency pairing, will be drastic through the remainder of 2020.
Protect CAD transfers with hedging maneuvers
If you run a business with interests in America, this reality is stomach-churning. One day, the CAD could be up 1%. The next, it could fall 2%. As a result, these fluctuating rates could cost you untold sums of money.
To defend against these disastrous shifts, start moving money through money transfer firms that offer forward contracts. These financial instruments lock in a currency rate, protecting you against an unexpected change in prices.
Have the stomach to gamble a bit? If you want to move money at unheard of rates, trying setting a limit order. When/if the CAD/USD price hits the mark you’ve placed, your transfer will process. Volatility in your favour doesn’t happen every day, so give this strategy a look.
Prepare for stormy seas ahead
If you invest in Canadian dollars or convert CAD to other currencies abroad, 2020 will be rough. We haven’t had a proper pandemic in a century, so it’s hard to say what exactly will happen. However, by using hedging tools like forwards and limit orders, you’ll get through in fine shape.