Stagnant Economic Growth Hurts Canadian Dollar
Reports in Canada showed unexpected zero economic growth for the month of April, the Canadian dollar came crashing down from a 30-year high. The Canadian currency dropped to 94.16 U.S. cents from yesterday’s 94.39. The zero growth report comes as a big surprise, for there had been a 0.3 percent increase in March. Investors have been betting on Canada’s Central Bank to increase interest rates in the attempt to lower the persistent inflation. A higher interest rate would mean an increase in value for the Canadian dollar. However, investors with long positions have been caught off guard as the Central Bank is very unlikely to raise interest rates as previously expected. Instead, interest rates are likely to go down in the attempt to reboot the economy.
Interestingly, the Canadian dollar had been trading at a 30-year high earlier today as crude oil prices rose above $70 per barrel. The value of Canada’s currency is highly dependent on the price of crude oil. This is because more than half of Canada’s commodities exports are crude oil. In January 2002, the Canadian dollar was at a record low at 61.76 U.S. cents when the price of oil was at $18 per barrel as compared to $70 today. Yet, today’s tumultuous drop in value shows that pessimistic investor expectations about future interest rates have a higher impact on Canada’s currency fluctuation.
The tremendous drop in value of the Canadian dollar against the U.S. dollar has hurt Canadian exports. As Canada and the U.S. have a close trade relationship, further impacts on the Canadian economy could be seen. Canadian exporters, such as Vancouver based Canfor Corp., have already taken hits. Canfor, as North America’s fourth largest lumber producer, posted a 1st quarter loss of $42.7 million Canadian. The company gets about 85% of sales in U.S. dollars. This is just another reason why the Central Bank will be unable to hike interest rates. Companies losing on the currency exchange will need lower interest rates for future investment purposes.
The U.S. Federal Reserve has reported marginal inflation increases and steady consumer spending may cause the dollar to become more attractive in the long run (Kathy Lien at DailyFX has more on the short term effect). This potential increase in value will likely further hurt the Canadian dollar.
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