Business investment and contagion – a deadly combination for CAD

Lower oil price, Canada's most important export and source of revenue is leading to lower business investment in the country, which now stands at lowest since the great recession of 2008/09.

Lower oil price is having its contagion effect across industries. Lower oil price is lowering revenues for oil producing sectors, which in turn reducing their investments into new wells, hitting oil exploration and drilling sector. This sector again impacting heavy equipment manufacturing as well as oil services industry on the downside.

As a result, more jobs are being lost than gained. In December, Canadian unemployment rate picked up another 0.1% and reached 7.1%. Higher unemployment is also impacting overall spending in the economy, creating trouble for consumer goods industry as well.

As oil dropped further compared to 2015, contagion could further derail economy.

Latest Business condition survey of Bank of Canada show, overall investment intentions in the next 12 months has fallen to negative for first time since the crisis, as shown in figure. As per the survey, 45% of the company said their investments would remain same, while 26% expect it to rise and 29% to decline.

Canadian Dollar has been battered to lowest level in more than a decade, however gained sharply over last two days as Bank of Canada (BOC) kept policy unchanged and oil recovered post-ECB stimulus hint. This rally however, may not sustain if oil price remain weak. Loonie is currently trading at 1.426 per Dollar.

RBC capital market believes "Despite a short-term CAD rally after the BOC failed to cut rates at the January 20 meeting, we believe that the uptrend in USD/CAD will persist. The 1.5000 level now serves as an anchor for the market."