© Colin Cieszynski
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The rate cut implemented by the Bank of Canada is similar to one that the Norges Bank did back in December 2014. We have seen that mortgage rates started to come down a little bit in Canada since then. It was not immediate, but in the days following that, some of the banks have started to lower their mortgage rates as well. However, the main thing for confidence is that the Central Bank remains supportive. Oil is a big part of the Canadian economy and in particular of its exports. The economy itself is actually much more diversified, since it is not just an energy one.
In time, what officials are trying to manage is a big short-term negative impact on jobs in certain regions, particularly Alberta, where the oil and gas sectors are bigger. However, at the same time, there is a positive impact of the lower energy prices on consumer and business spending, as well as the other sectors of the economy, where fuel is a cost, rather than revenue.
Moreover, the big decline in the Canadian Dollar, which happens along with the oil price collapse, is fantastic for Canada's exports. Eventually, there are a lot of benefits for Canada from the lower energy prices, much like for Europe. Unfortunately, a rather long transition period, where you get a negative impact primarily and then benefits later on, brings a lot of instability in the economy. Thus, the Central Bank needs to manage the problem with the rate cut.
TD Bank is cutting its 2015 forecast for Canada's economy due to the drop in oil prices and predicting that the Bank of Canada will cut its key interest rate by another quarter of a percentage point in March. Do you agree with this prediction?
Another quarter point interest rate cut is definitely possible. I do believe we will see the Canadian economy slowing in the near term, since the negative impact comes first, and it takes a while for the positive action to work through the system. The benefits perhaps may not come until Q3 or Q4. Thus, it would not be a surprise if the Central Bank does one more interest rate cut to 0.5%. I can suggest that it is probably similar to 2010, when they raised interest rates twice and then stopped.However, now the BoC will probably lower interest rates twice and stop in order to see what happens.
The drop in value of the Canadian Dollar, combined with the first signs that prices for crude are stabilizing, lead people to believe that the worst of this slump is now behind us. Moreover, sufficiently attractive conditions are now in place for companies with no hedges to begin taking action. Do you agree that there are no threats for the currency in particular?
I do not believe the threats are finished yet by any means; on the contrary, some are just getting started. Although crude oil has calmed down and settled into to $45-50 range, I do not think the selloff is completely finished. It could drop back to the $35-40 range, which is where it bottomed in 2008.
The bigger impact is that it could take a long time for oil to go back up. The last time we had price crash in the oil market in 1986, crude did not get back toward its pre-crash levels for almost 10 years. In other cases where we have seen oil price collapse, it stayed down for 2-5 years. From this point we could see the longer term impacts and the cause why the benefits take a while to work. Thus, the Canadian Dollar could certainly still be vulnerable.
What events will determine the Canadian Dollar throughout Q1 2015 and what are your forecasts for the USD/CAD, AUD/CAD and the CAD/JPY currency pairs in the foreseeable future?
I suppose the Canadian Dollar may stabilize around the current levels or weaken, but I do not see it rebounding very far. The USD/CAD currency pair is around 1.25 cents right now. In our point of view, if oil hits $40-$35, the pair could reach the 1.33 levels. I believe the AUD/CAD currency pair will hover around par. Just as Canada has been getting pulled down by falling oil price, the Australia's economy has been slowing due to falling prices on hydrocarbons and other commodities.
Finally, talking about the CAD/YEN currency pair, there is a previous support at around 92.90, but about a year ago it was around 90, which indicates that the Yen is still strengthening relative to the Loonie. I believe the Bank of Japan is probably done increasing their QE. Thus, the Yen can actually gain against the number of currencies and may improve a little more from here. However, it is still in at downtrend and trades around 94-80. Perhaps 92-90 levels are the lowest we might see the pair to fall in the near term.