Where is the dollar heading?

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It’s been quite a ride for the Canadian dollar. As late as 2013, the loonie was at par with the U.S. dollar before sliding to just over 70 cents in February 2016. That’s the lowest level it’s been since the recession.

Why is the Canadian dollar weaker? What should we expect in 2016?

There are three factors that have driven the dollar downward. First, the U.S. economy is performing strongly and attracting more investors. In fact, the U.S. dollar has appreciated not only against the Canadian dollar but against most currencies around the world.

Oil price pressure

Second, Canada is a major energy producer and the plunge in oil prices is putting pressure on our dollar. Oil prices have dropped by 70% since the summer of 2014, causing the dollar to decline in tandem.

Finally, the Canadian and U.S. central banks are on divergent paths. The Bank of Canada reduced its interest rate in January 2015 to shore up the economy, while the U.S. Federal Reserve took the opposite tack at the end of the year, raising its rate.

So what should we expect in 2016?

We believe the dollar will remain at more or less its current level through the remainder of 2016 because the three factors listed above will continue to be at play.

Strength in U.S.

The U.S. economy should remain strong this year with robust consumer demand supported by a solid job market and falling consumer debt. The U.S. will also benefit from high business confidence and more government spending.

Meanwhile, economic growth in Canada will continue to be hindered by lower investment in the energy sector. World oil supply is still higher than demand and while lower investment will eventually eliminate the glut, the transition has been slow to materialize.

Finally, the Federal Reserve raised interest rates before the Bank of Canada, creating renewed downward pressure on the dollar.

Dollar to remain weak

These factors suggest the value of the Canadian dollar will remain relatively weak versus the U.S. currency.

Obviously, there are winners and losers from the lower dollar. Importers, such as retailers and wholesalers, are suffering while exporters are benefitting with strong growth in Canadian shipments to the U.S. in recent years, excluding oil.

Ideal time to export

The conclusion is that if you’ve been thinking about growing your business by exporting to the U.S., this might be an ideal time. Not only is there more vigorous growth ahead in the American economy, but you get the bonus that comes from earning U.S. dollars on what you sell while spending Canadian dollars to make it.

For more economic news of interest to entrepreneurs, subscribe to BDC’s monthly Economic Letter.

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