As oil punches hole in the loonie, Canadian expats in UAE feel benefit

The Canadian dollar has suffered as the price of Canada’s main export, oil, has dropped and the US dollar has skyrocketed. Economists in the country do not think it will get stronger any time soon, which is good for expatriates, but bad for the locals.

Canadian one dollar coins sit at the Royal Canadian Mint. Brent Lewin / Bloomberg

The rapid fall of the Canadian dollar alongside plunging oil prices is hitting Canadians at home hard, with a marked increase in the cost of imported goods forcing households to reduce spending. However, for the tens of thousands of Canadian nationals living in the UAE, the speedy plunge of the loonie – named after the bird that appears on the Canadian dollar coin – to a 12-year low has been an opportunity to transfer more money home.

The Canadian dollar has lost nearly a third of its value since it was at parity with the US greenback from 2010 to 2013, falling below 70 US cents last week for the first time in more than a decade.

The currency has closely followed the drop in commodity prices, notably oil, which was until very recently the country’s main export product.

Crude prices have fallen below US$30 per barrel, after reaching new highs above $100 in 2014.

Canada’s currency will not be out of the woods any time soon, warned the economist Hendrix Vachon of Desjardins Bank. Last year, he pointed out, the Canadian dollar depreciated “against all other currencies of developed countries”, a dozen in all, from the Chinese yuan to the South Korean won, and the British pound to the euro.

The loonie lost 16 per cent against the US dollar last year and is down nearly 5 per cent this month alone.

In the short term, there is hope that a recovery in the United States – Canada’s neighbour and biggest trading partner – will bolster the Canadian economy and currency. If that happens, Mr Vachon said the loonie could rise to 75 US cents by the end of the year.

Others are more pessimistic. Macquarie Bank, for example, is expecting the loonie to continue its slide all the way to 59 US cents in the coming months, which has not happened since Canada began floating its currency in 1971.

That may be a boon to those sending more money home as well as Canada’s local tourism industry – bringing more Americans north to Canadian hotels and ski resorts – but it would entail further hardships for most living there.

“It is well known, the misfortune of some makes others happy,” the Hotel Association of Greater Montreal chief executive Eve Pare told AFP.

Uncertainty over Canada’s monetary policy may also cloud the outlook for a possible recovery.

The drop in the currency had fuelled calls from some market and industry players for the country’s central bank to hold interest rates steady.

With weaker oil prices knocking the currency to new lows nearly every day this month, some are arguing that another cut could destabilise the currency, doing more harm than good.

Rather than helping exporters, the loonie is now cutting into margins as US clients demand cheaper prices, some experts said, adding that it was lifting input prices and weakening investment sentiment.

“A growing number of people are advising against a rate cut,” said Stefane Marion, the chief economist at National Bank Financial.

“Rarely do we see the currency as being probably an important point of discussion during a Bank of Canada rate decision, but I believe this is one of those times.”

Interest rate hikes tend to support currencies, while cuts often weaken them.

But the Canadian dollar rallied against its US counterpart on Wednesday after the Bank of Canada surprised many traders by leaving rates on hold, rebounding from a fresh 12-year low despite a worsening rout in crude oil prices.

The central bank decided not to cut interest rates but admitted it was not an easy call, as concern about a rapid decline in the currency clashed with an economic slump.

For Brendan Murphy at Standish Mellon Asset Management, the Bank of Canada’s decision to keep borrowing costs steady does not spoil his bet on a rate cut – it just means it was not ripe yet.

He is not alone in that opinion. Derivatives traders see about a 50 per cent chance that the central bank will lower its benchmark rate by April, and almost a 60 per cent probability of a move by May. With oil plummeting, many investors were leaning toward a rate cut at Wednesday’s meeting.

Pessimists on the Canadian economy, including Mr Murphy, are not convinced by the central bank’s insistence that tumbling commodity prices are a “setback” and that the country is recovering. Oil, one of Canada’s main exports, is down more than 25 per cent this year amid volatility in Chinese markets and concern that global economic growth is cooling.

“We still believe further rate cuts will materialise over the coming months,” said Mr Murphy. “The bank is being too optimistic on their forecasts for 2016.”

An analysis from the Bank of Canada released with the rate decision showed that the economy would adjust to lower commodity prices in three phases over the next five years, with the impact of lower incomes to be felt more strongly later on and economic growth by 2020 being 2 per cent lower than it otherwise would have been.

Restructuring in the resource sector is the dominant factor in the first phase, as collapsing profits prompt firms to curtail business investment and employment, a staff analytical note said.

That restructuring phase should peak in the middle of this year, then stay roughly constant. The impact of lower incomes will start to hurt domestic consumption, while the lower Canadian dollar will boost non-commodity exports.

When the economy reaches the last stage, equilibrium, it will be consistent with potential output that is 2 per cent lower than the control case of if commodity prices had stayed at mid-2014 levels.

By then, the impact on growth rates will dissipate, but total exports are expected to be 0.2 per cent below where they would have been without the drop in commodities.

The analysis used the assumption that commodity prices stay roughly flat over the timeline. It used data up to November last year, so did not account for the most recent slide.