It may not happen in the near term, although recent declines suggest otherwise, but for a number of reasons, the Canadian dollar might well be in trouble. Much like our previous article about the difficult position the Canadian central bank faces, the CAD faces some seriously negative macroeconomic forces.
1. Foreign (U.S.) Protectionism
There have been quite a lot of serious talk of tariffs on Canadian good and the cancellation of NAFTA south of the border. As to whether these measures will emerge and to what extent, remains to be seen, but if they are even modestly implemented, they will exert negative pressure on the CAD, for exports are a large component of the Canadian economy.
2. Unwillingness to Raise Interest Rates
Increasing the prime interest rate is a surefire way to increase the forex value of a national currency, but we believe the Bank of Canada is very cautious to do this because of the massive housing/consumer credit bubble that currently exists. If they raise rates, homeowners and consumers will not be able to service their debt and this will unwind the credit bubble, which would cause loads of foreign capital to flee Canada. And, you guessed it, the Canadian dollar would suffer.
3. The end of the Housing Bubble
When (not if) the housing bubble deflates, there will surely be more pain felt by the Canadian dollar. Foreign investors will unload their Canadian real estate and move the money back to their local currency which will put downward pressure on the Canadian dollar. Additionally, the FIRE sector of the economy will suffer and this pain will be reflected on the FOREX markets, which will also harm the CAD enormously.
4. Global Economic Concerns
The global stock market is overvalued and there are large credit bubbles growing around the world. This is the product of a sustained, unprecedented period of low or nil prime interest rates. When this situation inevitably unwinds in the form of a stock market correction/crash, their will be, as usual, a capital flight from all currencies to ‘safe haven’ currencies such as the USD of the Japanese Yen.