From the start of July to July 20, the Canadian dollar lost about 2.5 cents against the American dollar or a little more than three percent.
The main impetus was the Bank of Canada on July 15 cutting its overnight lending rate by .25 percentage point to .5 percent.
It did this to stimulate the economy, which is contracting, mostly because of the sharp decline in oil prices and the resulting reduction in business investment in the energy sector. Also, bank governor Stephen Poloz talked about disappointing Canadian exports of non-energy commodities and other goods, as well as slower than expected global economic growth in the first part of this year.
Read Also
Green lentil market oversupplied
Farmers in Western Canada can expect price pressure on their new crop of green lentils, as the available supplies among the world’s major lentil-growing nations increase significantly.
This caused the bank to cut its 2015 real gross domestic product growth forecast to 1.1 percent from 1.9 percent and it sees 2016 growth at 2.3 percent, down from its previous forecast of 2.5 percent.
The Canadian dollar fell following the bank’s action and commercial banks downgraded their forecasts for the loonie’s value.
RBC thinks the loonie will stay under US77 cents to end of this year. Its forecast for the end of 2016 is 79.4 cent
BMO and CIBC are more negative, forecasting the loonie in the mid-to-low 75 cent range at the end of this year. BMO sees the loonie at 79.6 cents at end of 2016 and CIBC’s forecast is only 78 cents.
National Bank sees the loonie at 75 cents in the fourth quarter, dropping to 74 cents in the first quarter of 2016 and recovering to only 75 cents by the third quarter of 2016.
A weaker loonie gives exporters of Canadian commodities an edge over American exporters but it make imported goods, such as big combines and tractors more expensive.
The weakness of the loonie is made worse by the expectations that the United States Federal Reserve will increase interest rates sometime this fall.
Last week Federal Reserve chairperson Janet Yellen delivered the bank’s mid year economic outlook, saying there are signs the U.S. economy is recovering from the slowdown caused partly by the brutal winter weather. A rate hike is in the cards, but she played down when the increase will occur.
Continued improvements in the U.S. employment rate and inflation gains toward the bank’s goal of two percent will likely cement the decision to raise rates.
But Yellen also said the bank is unlikely to start an aggressive program of multiple rate increases.
This relative strength in the U.S. economy and the expectation of a rate hike has caused the U.S. dollar to appreciate relative to many world currencies.
That works against its agricultural exports and is a negative factor for the futures prices of its crops and livestock.
The effects of these currency fluctuations on Canadian crop prices are not clearly visible.
For example, if the U.S. buck appreciates strongly against other currencies, that would be bad for American wheat exports.
The Minneapolis spring wheat futures contract would likely fall.
If the loonie has depreciated at the same time, then the Canadian price should not reflect that Minneapolis futures decline, but the calculation is in the basis and, as I’ve written here before, Canadian grain buyers’ basis levels are as clear as mud.
