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Canadian dollar likely to fall lower in value

'Ill-conceived' deficits don't help the economy in the long run

I’ve received many inquiries from cattle producers regarding the outlook for the deteriorating Canadian dollar. Many cattle producers don’t watch daily market activity and recently, we’ve seen sharper changes from week to week as the Canadian recession deepens. A dovish monetary policy from the Bank of Canada along with left-leaning fiscal policy from the ruling Liberals have enhanced the ongoing weakness brought on by overall lower commodity prices.

In January, Canadian exports of live cattle to the U.S increased, cleaning up market-ready supplies, which was partially brought on by the softer Canadian dollar. We’ll likely see an increase in exports of replacement cattle to the U.S after a year-over-year decline in feeder cattle exports during 2015.

The main question is where do we go from here and what are the factors to watch moving forward so that cattle producers can factor in a reasonable value when doing their price projections or budgets?

When interest rates or bond yields are lower in one country versus another, investors will move funds from the lower-yielding currency to the higher-yielding currency. Over the course of the next year, the Bank of Canada will have a tendency to lower interest rates while the U.S. Federal Reserve will be inclined to raise interest rates. In Canada, mortgages are based on the yields of five and 10-year bonds and the central bank needs to keep rates low as consumers struggle with high household debt and rising taxes.

Secondly, the lower currency generally stimulates exports not only for export commodities but also the manufacturing sector. Growth in Eastern Canada manufacturing is needed to offset the lows in the commodity cycle. A lower currency is viewed as a tax on the consumer to support the country’s export values. The price of imported goods valued in U.S. dollars are sharply higher such as fruits and vegetables while producers of agriculture products and other commodities are enhanced on the world market when valued in Canadian dollars.

Alberta, Ontario and other provincial governments are running massive deficits while the Federal government is following this ill-conceived behaviour in an effort to stimulate the economy. Higher taxes, less revenue and deficit spending are all factors that wreak havoc on a currency.

Better approach

The investment climate in Canada has fallen sharply on the world stage and major institutional investors are pulling money out of Canada. The environment has radically shifted within a year. The solution to the current recessionary problem is “Klein economics” (reference to the late Alberta Premier Ralph Klein) whereby you run the government like your house. In year’s of tough times, you cut spending and keep the tax burden low thereby letting consumers stimulate the economy given we have a PST and GST in most provinces.

Secondly, create an investment-friendly edge over all other areas of the world with lower personal and corporate taxes. Given the prolonged outlook of the recession for Canada, government injections will run the course and then fade and the overall situation will be worse than in the beginning. Provincial and federal fiscal policy will continue to pressure the Canadian dollar long term. We will not see a turnaround in these policies anytime soon.

It appears that China’s growth rate is not as large as earlier anticipated and the slower growth has set a negative tone for major currencies reliant on commodity exports. China’s equity market is like a casino because investors cannot trust the balance sheet. Major investors cannot trade shares in larger corporations so the large swings are due to the inexperienced, untrained, and cash-strapped consumer. Economic data from China is also unreliable so there are hints that this bubble from past year’s growth got ahead of itself. The world is interconnected with trade and when the second largest economy slows down, all economies will feel it. China is moving to a consumptive economy (similar to the U.S) from an export economy. Therefore, expect easing of growth from the China and don’t expect this region of the world to stimulate local demand.

Finally, I have to talk about the oil sector given the high correlation with crude oil values and the Canadian dollar. U.S. crude oil stocks are sharply above the five-year average, which has weighed on energy prices and it is extremely difficult to forecast when stocks will start to drop. There is no signal of slowdown from major exporters and with Iran coming on stream, the burdensome supply could actually get worse before getting better.

Overall, the dovish policy from the Bank of Canada and fiscal policy of the federal government will keep pressure on the Canadian dollar. Crude oil stocks have been building and there is no signal that the burdensome supply will be alleviated anytime soon. The Canadian dollar is currently at 13-year lows and there is downside potential to 0.62/Cdn which was the low in 2002.

About the author

Columnist

Jerry Klassen

Jerry Klassen is manager of the Canadian office for Swiss-based grain trader GAP SA Grains and Products Ltd. and also president and founder of Resilient Capital, a specialist in commodity futures trading and commodity market analysis. He can be reached at (204) 504-8339 or visit his website at www.resilcapital.com.

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