Canola edged slightly higher last week, even as analysts increased their forecasts for South America’s soybean production and crude oil prices fell.
Support came from solid soy oil prices and the low Canadian dollar, which fell to an 11 1/2 year low.
The loonie is under pressure as crude oil prices fall on burgeoning stocks.
The Canadian Imperial Bank of Commerce thinks the dollar could fall to US70 cents in the first quarter of 2016 before making a modest recovery.
Other bank economists think it will stay in the low 70s in the first half of next year.
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The CIBC cited weak prices for the oil and other commodities that Canada produces and the expectation that the U.S. Federal Reserve would begin to raise its key interest rate this week. This column was written before the Fed met Dec. 15-16.
Meanwhile, Bank of Canada governor Stephen Poloz recently speculated about the potential for his institution to shift to “negative” interest rates to spur the economy if weak oil drags down economic activity in this country even more, creating a 2008-like recession.
The big commercial banks use the Bank of Canada as a handy venue to transfer money between each other. Their deposits in the bank now generate .5 percent interest, but if the bank went to a negative rate, then they would be charged to deposit the money.
That would present a new choice to the commercial banks:
- Keep the money in the Bank of Canada and lose money.
- Lower commercial borrowing rates and lend more money to consumers, who will spend it.
The central bank expects the commercial banks would choose to lend more money at cheaper rates and stimulate the economy.
It is good that Poloz has recession fighting tools in his box, but we hope it does not come to that.
Nevertheless, all signs now point to the loonie remaining weak for months, barely climbing to the mid 70s by the end of 2016.
That is a damper on U.S. travel and can make imported goods more expensive, but a weak loonie encourages Canadian grain and oilseed exports because it makes it easier for exporters to under-sell the United States.
With the support of a weak loonie, canola exports are running 10 percent ahead of last year.
Wheat exports, which were expected to be down about 15 percent, are so far down only .2 percent, while U.S. wheat exports are 18 percent behind as the industry in that country struggles with the strong American buck.
The weak loonie also encourages domestic canola crushers to process more. The crush is up 11 percent over the same time last year.
