Worrying prospects keep beating the Canadian dollar down

Since the start of 2017, the Canadian dollar (CAD) is in the 20 worst performing global currencies (see below). That said, there are some factors that are supportive of a stronger CAD: stronger exports (up 3.8% to a record $47 billion in March); improved GDP growth in the first quarter, and; lower unemployment rate (down to 6.5% in April, the lowest since October 2008). But despite these positive fundamentals, the Canadian dollar remains on a weakening trend, having lost more than 2% against the US dollar this year and entered the league of biggest global currency losers which mainly contains third-world currencies.

There is a number of reasons for the weak CAD.  First, the recent gains in exports are considered temporary while there are still fears about protectionist US policies. Thus skepticism remains about longer term prospects for Canada’s trade growth. 

Second, Canada’s economy is now thought to depend too much on real estate prices, as much as it depends on oil and gas. The Financial Post provides RBC’s estimate that a 10% decline in national home prices would reduce Canada’s GDP growth by a full percentage point. With major real estate markets such as Toronto and Vancouver arguably feeling like a bubble, the Canadian economy now faces risks from changing regulatory policies (more restrictive) and foreign capital flows.

Furthermore, the problems stemming from weakness at Home Capital Group, the largest alternative mortgage provider in Canada (we wrote about last week), is also adding to the pressure on the Canadian dollar. The problem with a lower-ranked mortgage lender is reminding foreign investors of the US sub-prime mortgage crash which leads to the outflow of funds from Canadian capital markets.

Ukrainian Credit Union Limited