Dubai: What do the Canadian dollar, Japanese yen, and the Chinese yuan have in common?
All the above currencies have weakened due to different reasons, and that has been boosting exports, and expat populations abroad like in the UAE are also benefiting, but imports may take a hit in the home country.
“The falling Canadian dollar is bad news for Canadians in the home country, since their imports would become more expensive, while lesser money will come in through exports,” said Adeeb Ahamed, Chief executive officer at LuLu Exchange. But Canadian expats in the UAE or elsewhere may get benefited.
The Canadian dollar has been in depreciating mode due to falling prices of oil, which the country exports, and plunged further after China decided to devalue its yuan.
In addition, the Bank of Canada surprised with rate cut increasing its dovish reputation. The central bank might even be ready to cut interest rates further when deflationary tendency become more pronounced, raising its preference for a weaker currency.
Canada is also the fifth-largest oil-producing country in the world and the sinking of global oil prices below $40 a barrel have also adversely affected the economy.
However, analysts expect the Canadian dollar to stabilise along with crude prices.
“We forecast the USD/CAD to stabilise around the current level of 1.30 on the back of a stabilisation of crude prices. The divergence on the monetary policy front is largely discounted in the current exchange rate. According to our calculation, the Canadian dollar is by now as deep undervalued as the euro, a little less pronounced than the Japanese yen. The deep undervaluation limits its downside,” said David Kohl, Chief Currency Strategist, Julius Baer.
The Canadian dollar is not the only currency which is weak against the US dollar. Indeed most of the currencies we follow are undervalued or deeply undervalued against the USD, Kohl added.
Saxo Bank’s head of Forex strategy, John Hardy expects USD/CAD to fall as low as 1.35 to 1.36 before the Canadian dollar finds a bottom versus the US dollar, though there is some risk that “we see 1.40 or higher if oil prices remain this depressed or head lower still.”
However, if the US economy continues to recover, Saxo Bank expect the Canadian dollar to find some support due to its heavy economic exposure its neighbour to the south — if not versus the US dollar, then perhaps against other currencies more broadly speaking.
“In other words, its underperformance in broad terms may be getting excessive soon,” Hardy said.
Competitiveness:
“There is certainly a competitiveness or economic growth issue for any oil exporter that remains pegged to the USD, where it is highly inappropriate for the exporter’s currency to continue to strengthen together with the US dollar while the income from the chief export, oil, is collapsing,” Hardy said.
The Gulf countries compete with Canadian oil for market share.
“The weakness in the likes of the Russian rouble, Mexican peso, Norwegian krone, and Canadian dollar are all softening the impact of the weakness of oil prices in USD terms because the fall in those prices is cushioned by domestic currency weakness. The longer oil prices remain this low or lower, the more significant strain will be felt on USD pegs by oil exporters around the world,” Hardy added.
