The outlook for the Canadian dollar remains largely under pressure as the struggling currency looks to find its footing in the global market. The currency saw a drop in its interest rates recently as the Bank of Canada followed in the footsteps of the United States by dropping their interest rates by 50 basis points. The rate cut saw the rate drop from 1.75% to 1.25%, with the market anticipating further cuts in the near future. The falling price of oil amid the coronavirus outbreak also has the Canadian currency on edge as oil is the nations number one export. With OPEC+ recently failing to come to an agreement on the reduction of oil output, the currency has struggled as Saudi Arabia announced it would up its production efforts following the disagreement.
Oil Prices to Keep CAD in Stranglehold
The market is expecting the price of oil to remain low, which will result in an enduring negative effect on Canada’s economy and capital flows. The Canadian dollar fell by over 2% against the pound Sterling on Monday following the failure of OPEC+ in securing an agreement concerning the oil production restrictions in order to prop up prices. The decline in CAD allowed the GBP/CAD exchange rate to push fresh highs at 1.8053, before gains were levelled back to the 1.77 mark after meeting some notable technical resistance.
The price of oil now sees major crude benchmarks falling to below $40 a barrel, it is believed that the break-even point for many global producers sits at around the $60 a barrel price point, suggesting that many of the leading world oil production companies will be seeing declines in their profits in the weeks to come.
Canadian Exports to Take a Hit If Oil Price Remains Low
Canada is the fourth largest producer and exporter of oil in the world, with 96% of Canada’s proven oil reserve being located in the oil sands of Alberta. These oil sands accounted for 64% of Canada’s oil production in 2018 or 2.9 million barrels a day, with the remainder coming from conventional extraction methods. The market does not predict that a sudden drop in oil prices will lead to a large drop in production as there are relatively few new projects coming on line, it is these projects which are usually the more vulnerable to sharp drops in prices.
However, for CAD, its oil exports account for a little over 20% of the countries total exports, making it a defining pillar in the countries GDP figure and a notable foreign exchange earner which holds up the value of the Canadian dollar. Therefore, if oil prices remain low, the less Canada will earn on foreign income, prompting a weaker Canadian dollar up ahead.
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