Today’s Forex Guide

Canada Economy Forecast: Oil Prices, GDP, Interest Rates


Oct.22.2015

Is the Canadian economy only having a few good weeks or is the recession finally over? I have been covering the Canadian dollar forex dance moves versus Mr. Euro  for quite a while now, but due to popular demand I had no choice but to dedicate today's update solely to a Canada economy forecast, and the movements of Ms. Canada who goes by the forex nickname, Loonie. Here are 5 important points about the economy of the Great White North and its currency.

Canada economy cartoon

 1- Lowering Oil Prices

Relationship between oil and Canadian dollar: For baby Invest Diva's let me explain that there is a positive correlation between oil prices and the Canadian dollar. This correlation is high and has existed for a long time. According to Investopedia, a 10-year analysis of the correlation between the Canadian currency (against the US dollar) and oil prices has shown that there is a 0.78 positive relationship, with a score of 1 indicating a perfectly positive relationship. This high correlation can be directly attributed to the way Canada earns US dollars, and the percentage of Canada's revenue that this constitutes.

Oil prices history: Now for those of you who have been sleeping under a rock (or at the beach) in the past few months, after consolidating for over three years, oil prices started to drop massively in the middle of 2014, dragging Ms. Canada with it. Crude oil bounced back a bit in the past few months, hitting the 53 level on rumors about lower supply from the US and Iran sanctions concerns, but it wasn't able to hold that level and is currently trading back below 50 again.

crude oil chart

Oil supply: Do you know what drives oil prices? Surprise, surprise! It is supply and demand. And unfortunately for oil bulls, there is a heck a lot of supply coming the markets way.

The biggest addition to the oil supply family is Iran. The U.S. and five other nations agreed in July to lift sanctions against Iran in return for curbs on its nuclear program, and this past Sunday the agreement was formalized based on Iran's meeting its commitments to the deal.

An Iranian official this week said the country has already secured buyers from Europe and Asia for more than 500,000 barrels a day in new exports once sanctions are lifted. The final assessment by the International Atomic Energy Agency is expected to be completed by Dec. 15. To top this off, Iran also has about 40 million barrels of condensates in floating storage. Talk about making an entrance in the global oil market!

US inventories could be the second driver of global oil prices and it showed an 8 million barrel surge in crude stocks last week, placing the US in an oversupply situation. Russia and Saudi Arabia are the world's biggest oil producers, and none of them are showing signs of reducing their production.

Oil demand: There is no doubt that  global demand for electricity/battery or even hydrogen powered vehicles has been growing. Electricity is itself fueled by renewables other than oil. At the same time, oil demand from the emerging markets and China has been going down. China reported GDP of 6.9 percent for the third quarter, just below last quarter's 7 percent pace which has been worrying its trading buddies. All of this strongly signals that in 2016 there could be even lower demand for oil.

2. Downgraded GDP Forecasts

As we learned at Invest Diva's education course, a country's GDP has a direct impact on the strength of its economy, and therefore its currency.

Canada released better than expected GDP in the month of September which led to strength for the Canadian dollar. Now that's good news, right? However the Bank of Canada (BOC) recently revised its outlook for the Canadian economy. Their policymakers decided to lower their growth forecasts for 2016 and 2017. From their initial estimate of a 2.3% economic expansion next year and 2.6% GDP growth in 2017, central bank officials downgraded these to just 2% and 2.5% respectively.

This led to a selloff of the Canadian dollar upon release, however in the long run we do need to take this with a grain of salt. The reason for this is that these are ultimately forecasts and if the actual readings turn out better than expected, we could see sudden strength in the Loonie.

The next Canadian GDP release is scheduled for October 30th, just as Halloween kicks in,and could just scare the s*!t out of the trading crowd.

3- Unlikelihood of an Interest Rate Hike

The Canadian central bank has already cut interest rates twice this year and it is now sitting at 0.50%. Their action came in efforts to shield Canada's economy forecast from incoming headwinds. But with oil prices settling down and a brand new liberal Prime Minister, it looks like the bank's governor would hold off on new rate cuts for the time being.

But how about a rate hike? After all, Canada's neighboring country (HINT: USA) has been making a whole big deal out of it!

While we did hear some upbeat notes from BOC members as they pointed out the recent depreciation of the Canadian dollar  has been able to offset disinflationary pressures, they aren't likely to announce any interest rate hikes either. Given the downbeat outlook for the oil industry, and both global and domestic growth, this sounds quite reasonable. For now, BOC Governor Poloz and his team are in a wait-and-see mode, predicting that the Canadian economy won’t be able to return to full capacity until mid-2017.

4- No Easing on the Horizon

Now that a  Conservative government is replaced by a Liberal government, market participants are expecting the new government to increase fiscal spending. With that, as well as their positive view of a weak Canadian currency which has been helping to keep their inflation stable, BOC didn't show any appetite to stimulate the economy by quantitative easing.

5- Bearish Technical Signals

Taking a look at the USD/CAD pair's monthly forex chart, there is an interesting bullish reversal pattern that has been forming in the past 13 years! It is called a Double Bottom pattern. And the pair confirmed a break above the neckline back in August, and remains above the Ichimoku cloud. Keep in mind that the weaker the Canadian dollar, the higher the USD/CAD pair flies. So even though the pair saw a pullback in October, this could easily be explained by a Fibonacci retracement theory which only shows the natural market cycle after a long period of an uptrend.

In this scenario, the pair's next bullish stop could be the high of 2003, at 1.37.

USD CAD Forecast

Putting the whole thing together (the new BOC press conference, Canada's new election results and other global factors,) Canada's economy seems to be off for a neutral stance in the short time frame, with a weaker outlook from a long term point of view. The fundamental overview can also be backed up by technical analysis when taking a look at the monthly forex chart of the Canadian dollar versus the US dollar, or the Euro.

USD/CAD levels to watch out for:

Support Levels Turning Point Resistance Levels
1.28 1.30 1.35
1.25 1.33 1.37

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