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Should the Canadian Dollar Expect a Gloomy Future?

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Dec. 30 2015, Published 11:21 a.m. ET

Canadian dollar hit near 12-year lows in 2015

The commodity-linked currencies were on a downtrend in 2015 with the fall in Chinese demand and the declining crude prices. The Canadian dollar had the biggest slump of the major currencies in 2015 as it lost nearly 15% of its value against major currencies like the US dollar, hitting a 12-year low. The fall in crude prices hit the economy significantly, and it fell into a recession in the initial part of 2015. The early rate-cutting measures by the Bank of Canada failed to spur the economy. The second half of 2015 put additional pressure on the Canadian dollar to US Dollar currency pair, as the US rate hike boosted the US dollar and the further decline of crude hurt the Canadian dollar.

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What do the fundamentals indicate?

The new year is not expected to be much better for the pair, as the current account deficit continues to fall, according to the latest release in December. With the continuing decline of crude prices in the last two months expected to have a lagging effect on the current account, the initial quarter will see a further decline in the current account. The current account usually has a direct relation to the currency and a further fall might see the currency test the 1.5 levels. If we combine that with expectations of a further fall in crude prices given that the supply is way ahead of the demand, the first half of 2016 does indeed look bleak.

ETFs and ADRs that could be affected

Through the year from January 2, 2015, to December 28, 2015, the iShares MSCI Canada ETF (EWC) ended on a lower note by 24.5%. The Guggenheim CurrencyShares Canadian Dollar ETF (FXC) followed a similar trajectory and ended with a fall of 15.6%.

Canadian ADRs (American depositary receipts) trading in the US markets ended the year on a negative note. Suncor Energy (SU) fell by 17.1%. In the banking sector, Royal Bank of Canada (RY) and Canadian Imperial Bank of Commerce (CM) fell by 20.9% and 22.4%, respectively.

We will be covering Latin American and other emerging market currencies in the next series.

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