The Canadian dollar is viewed by the rest of the world as a petrodollar. The falling price of oil has been followed by a fall in the value of the Canadian dollar. However, that is only part of the story. There are other factors to consider. The Bank of Canada (BOC) has cut interest rates twice in 2015 which has had a negative effect on the dollar. The BOC cut rates based on oil recovering to the $60 level by the fourth quarter of 2015 which hasn’t happen. Will the BOC cut rates again?
Now, the U.S. Fed has signaled that they are going to raise interest rates for the first time in nine years on Dec 16th. Another rate cut by the BOC or more rate hikes by the Federal Reserve during 2016 will put even more downward pressure on the Canadian dollar. Some economists think that the U.S. Fed will raise interest rates three more times in 2016!
Yesterday, the price of oil was flat but our dollar lost some value. Bank of Canada announced that negative interest rates is an option for Canada. Can you imagine having to pay interest to your financial institution on money sitting in your savings accounts?
My thoughts: the Canadian dollar could continue to fall to the 66 to 68 cent level by the end of 2016 if the price of oil doesn’t rebound or if the Fed raises interest rates. I only hope that I am wrong!
Over the past year I have written eight posts dedicated to the oil market. My bearish view hasn’t change from a year ago when I wrote Don’t Catch a Falling Knife & Dead Cat Bounce Here is a sample of that I wrote:
- There is still a lot of fear in the oil market.
- The so-called experts are often wrong when predicting where the price of oil will stabilize.
- It takes time for oil companies to stop pumping out oil from existing wells. It is more complicated than just closing the tap.
- Oil companies have made some commitments to spend money on new drill sites that can’t be postponed.
- Oil prices are falling due to oversupply and OPEC says that it isn’t going to cut production.
- Hedge funds are short selling oil stocks driving the price even lower.
- Tax loss selling season isn’t over yet.
Add the fact that the OPEC meeting held on Dec 4, 2015 didn’t agree to production cuts and confirmed that members are cheating on their quotas. They are currently over producing 1.5 million barrels of oil per day and nothing will be done before their next meeting scheduled for June 2016!
My thoughts: I believe that the price of oil will not rebound until late in 2016 at the earliest. I am still avoiding investing in the oil & gas sector.
Some good news on lower-income taxes for millions of Canadians. Many couples will see an average tax savings of $540 and $330 for single individuals. The bad news is the tax rate for individuals making over $200,000 will face a tax increase to 33% from 29%. Couples with children under 18 will no longer be able to income split and the yearly contribution limit for TFSA has been reduced back to $5,500 per year.
My thoughts: it’s too little too late to help the Canadian economy. Most of my investments are still outside of Canada. I expect negative returns in the Toronto stock market will continue for most of 2016.
Investment Ideas: Look for companies that get revenue from outside of Canada and could benefit from our weak dollar. I found eight companies that get more than 70% of their revenue outside of Canada. Some of these companies have already moved up in price during 2015.
For my U.S. readers: five of these companies are listed on the U.S. stock exchanges
CCL INDUSTRIES CL B (CCL.B: Toronto)
CONSTELLATION SOFTWR (CSU: Toronto)
ELEMENT FIN CORP. J (EFN: Toronto)
CGI GROUP CL A SV (GIB.A: Toronto) (GIB: New York)
MAGNA INT’L INC. (MG: Toronto) (MGA: New York)
BROOKFLD ASSET MANAGEMENT (BAM.A: Toronto) (BAM: New York)
GILDAN ACTIVEWEAR INC (GIL: Toronto) (GIL: New York)
DESCARTES SYS GRP INC (DSG: Toronto) (DSGX: NASDAQ)