Oil, housing risks to keep dollar trending low through the first quarter of 2015
TORONTO—With the Canadian dollar reaching US$0.8486 on January 2, its time to evaluate our target for the Canadian dollar through the first quarter of 2015.
From July 6 to November 25, 2014, the currency fluctuated in a rather comfortable band with normal regressions lasting 7 to 13 days. During this time period the loonie suffered suppression from two sources: the rising value of U.S. dollar and declining value of oil.
Many currency specialists were asking themselves which factor contributes more to the loonie’s decline. They soon discovered the answer.
Since November 25, the benchmark West Texas Intermediate (WTI) began a rapid decline. WTI registered US$76.87 on November 25, but slid to $52.33 by January 2, a position that definitely does not help our loonie.
Perhaps now is the time to take a look at the slightly bigger picture. Historically speaking, when the Canadian dollar dips below the 0.88 to 0.86 cent range, we should prepare ourselves for tough times.
Indeed, since the drop in oil prices, the loonie has lost 4.24 cents within the last six weeks. In this time period we have not only decisively crossed the 0.88-0.86 values but also lost one of major pillars of our economy: oil exports, which contribute significantly to our GDP.
Overall, the loonie lost about 9.7 per cent within the last 6 months.
Now, the dollar has entered historical levels similar to those seen in May 2009, January 2009, October 2008 and January to March 2007.
The main question is where will the greenback/loonie pair fluctuate from the present level? Considering the value of international trade between the U.S. and Canada, the answer to this question has some financial consequence.
We can expect oil to continue decline. In fact, we can reasonably predict that oil values will consolidate at levels lower than the last consolidation that occurred from December 16, 2008 to February 15, 2009.
We should also expect another pillar supporting our loonie to start shaking its foundation—real estate values. The high value of dept owned by Canadians is directly related to the overvaluation of Canadian real estate.
I expect the greenback to consistently grow against major currencies, including the Canadian dollar. This link to my EURO/USD Holiday Update underscores this prediction
Considering the inherent weakness of oil prices and Canadian real estate values, my target for Canadian currency ranges from US$0.8150 to 0.8050.
In my opinion the loonie should not cross the 0.80-cent threshold since it will go through the long overdue correction much sooner.
However, I also expect that the loonie will snap back to its trend after the correction ends.