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USD/CAD: Canadian dollar under pressure as oil prices crumble

H.S. Borji
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The Canadian dollar plunged to a new five-year low Monday, picking up where it left off in 2014 as oil prices fell below $50 a barrel.

The loonie, as the Canadian dollar is known, hit a session low of 0.8455 US before rebounding later on in the day. The currency would subsequently consolidate at 0.8505 US.

The USDCAD exchange rate consolidated at 1.1755. The markets are eyeing a clean break above the psychological 1.1800 level. The pair is expected to top 1.2000 in the short run as investors continue to buy-in to the US dollar.

The US dollar was supported across the board Monday, with the US dollar index jumping 0.34 percent to 91.39. The greenback climbed to a fresh nine-year high against the euro, as the EURUSD lost the 1.20 handle. The pair consolidated at 1.1938 ahead of Tuesday’s Asian session. The pair bottomed out at 1.1893 on Monday.

Plunging oil prices continued to weigh on the Canadian currency, raising concerns about the future of Canada’s oil industry. Oil prices fell below $50 a barrel at one point for the first time in more than five years. Brent crude consolidated at $53.11 a barrel, declining 5.9 percent. North American crude held steady at $50.09 a barrel.

While not a threat in the macroeconomic sense, cheap oil could hamstring Canada’s recovery in 2015. The export-driven economy relies heavily on natural resources to create jobs and prosperity. Natural resources drive about one-fifth of Canada’s economy and are responsible for about 10 percent of all jobs. Diminishing oil revenues and narrower profit margins could result in further layoffs and a slowdown in business investment, as oil companies weigh the opportunity costs of production in the present climate.

According to the Bank of Canada, oil prices below $90 a barrel could shave a quarter percentage point off Canadian GDP this year. In the Bank’s view, Canada needs to grow more than 2 percent annually to close the output gap, which refers to the difference between actual and potential GDP. According to BOC forecasts, this is not expected to occur before the middle of next year.

The Canadian economy rose 0.3 percent in October despite sliding oil prices, Statistics Canada reported last month. The reading raised optimism about Canadian growth prospects in the fourth quarter. Canada posted an impressive 2.8 percent annual growth rate in the third quarter, well above forecasts. However, economists continue to caution about the impact of cheap oil in the coming months as producers scale back output levels and continue laying off workers.

Statistics Canada will report on November international merchandise trade on Wednesday. Economists forecast a narrow trade deficit in November after Canada posted a slight surplus the previous month. Canada exported $44.92 billion worth of goods in October, official data showed.

The national statistics agency will close out the week with reports on housing activity and employment. Canada’s economy is expected to have added 15,000 jobs last month after shedding nearly 11,000 in November. The unemployment rate is expected to hold steady at 6.6 percent.

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