Canadian Dollar Dips as Oil Rips Lower

Market Trends - 22/03/2017

While it is easy to cite broad improvements in the Canadian economy following retail figures released on Tuesday, the nation continues to face an uphill road towards recovery amid a slew of warnings on the outlook.

Recent gains in trade which saw the surplus widen, combined with unemployment at a 2-year low, have not been enough to dissuade major global institutions of the risks lying in wait for the economy.  The Bank of International Settlements issued the first cautionary statement, pointing to liabilities in the banking and housing sectors as causes for concern.

Considering the amount of credit extended during this period of ultra-low interest rates, the BIS indicated that the broadening credit-to-GDP ratio could be a worrying development, creating a notable looming issue for the banking sector, especially if interest rates begin to rise.

However, household debt levels that are deemed unsustainable, problems emerging in housing, and the energy sector could pose even greater risks to the outlook.

With a significant amount of Canadian economic activity derived specifically from the oil and gas sector, any sustained dip in the price of oil and gas over the medium-term could have a dramatic impact on fundamentals.

When it comes to the Canadian dollar, the currency has shown that it is particularly sensitive to changes in energy prices, evidenced by the recent weakness in the currency.

Even though the US dollar has faced a massive selloff following the latest FOMC decision, the Canadian dollar remains under pressure against its US counterpart.

Apart from the conditions in the energy sector, the other major issue facing the outlook is a housing market in which prices have continued a steep retreat following an epic influx of foreign capital over the last few years.

As prices balloon to unaffordable levels and buyers dry up, a main source of Canadian household wealth is at risk.  Should prices start to tumble, there is no telling how far they will drop, likely dragging the Canadian dollar down as well.

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