Will Canada cut interest rates in January?

In today’s report we will look a little deeper at what is causing the Canadian Dollar to weaken off so significantly and what the future looks like for the Loonie.

Canada more dependant on oil than ever

Over the past few months the Canadian economy has been suffering badly and this has had a huge knock on effect to its currency. The problem the country faces, is that there does not appear to be a way out of the current hole it is in.

Consumer debt is still very high meaning consumers have less money to spend on the high street. Oil has recently hit a 12 year low, falling below $30 a barrel, with some analysts now predicting it could go as low as $10 a barrel if markets don’t improve. Other raw materials and commodity prices have fallen away to the lowest levels since 1991.

Oil is by far Canada’s largest export and has been almost entirely responsible for the countries growth over the past decade. When we have seen the price of oil and raw material dip in the past, it has had a minimal effect on the price of the Loonie. This is because the countries manufacturing and non-energy exports have previously “bridged the gap” in the economic outlook.

With far less being exported and ferocious competition from Mexico, there is little to help the Canadian economy recover. This leaves very Canada exposed and unless we see a recovery in oil and commodity prices, we could see the it weaken further.

Will Canada cut interest rates in January?

Analysts from several major banks are now calling for an interest rate cut at this months meeting held on the 20th Jan. If the Bank of Canada cut interest rates from the current 0.5% to 0.25%, this would have a very negative effect in the Loonie in the short term, as it is likely to weaken against a basket of major currencies. We have only seen this low once before following the financial crisis in 2009. If the price of Oil does not recover in the near future, which many predict it won’t, it is very hard to see how the Loonie will hold its value.

Today’s data effecting exchange rates

Today the only real data effecting the GBP/CAD exchange rates, will be the Crude Oil inventories from the US. This shows the total change in the number of barrels held by commercial firms during the past week. This normally has a fairly muted response but with the current situation with Oil prices, this will be much closely watched than normal. After an abysmal previous figure of -5.1m this weeks was predicted to show a positive figure of 1.9m. The Actual figure missed the estimate by some margin and come in at a positive 0.2M. This caused the Loonie to weaken further against sterling, pushing rates over 2.06.

GBP/CAD Graph

Canada cut interest rates

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Richard BeaumontWritten by:
Richard Beaumont
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