-- Neal Kimberley is an FX market analyst for Reuters. The opinions expressed are his own --
By Neal Kimberley
LONDON (Reuters)- The Canadian dollar may weaken further against its U.S. counterpart in coming months as Canada’s economic fundamentals and prices of its abundant natural resources become less supportive of the currency.
The arguments for Canadian dollar strength no longer resonate so strongly.
Global demand for Canada’s natural resources has been a key driver of demand for the Canadian dollar, but with even China’s appetite for imported commodities slowing, that pillar of support may be being eroded.
Indeed, the Canadian dollar, which was trading at below parity with the U.S. dollar in mid-January, lost 1.2 percent last week in reaction to weak global commodity prices.
This is particularly evident in the slide in the oil price.
In the first quarter of 2013, Western Canadian Select (WCS) crude oil sold for an average $67.19 a barrel, 12 percent less than the year before.
The benchmark West Texas Intermediate (WTI) sold at an average of $94.35 a barrel.
If that $27 a barrel discount continues, given that WTI traded near $90 a barrel on Wednesday, that implies an oil price for WCS well below the C$75.29 ($73.24) being budgeted for by Saskatchewan, a province of western Canada heavily dependent on resource revenues.
Deeply discounted prices for Canadian heavy crude oil drove Saskatchewan’s provincial neighbor Alberta to a sixth successive deficit, Alberta’s finance minister said on March 7.
None of this can really be seen as supportive for the Canadian dollar.
More broadly, the Canadian economy is already struggling to cope with weak foreign markets and a strong domestic dollar.
Canada’s central bank chopped its 2013 growth forecast to 1.5 percent from 2 percent on April 17.
Yet on April 18, Bank of Canada Governor Mark Carney was still warning interest rates could rise sooner if the growth in Canadian household debt, which is related to the housing market, was not tempered.
Low interest rates have fuelled both a housing-market boom in Canada and a surge in household debt.
However data on Friday showed Canadian inflation slowing in March to 1 percent, half the Bank of Canada’s 2 percent target.
Perhaps in response to the combination of the benign price data and the fact of the Bank of Canada’s pared growth forecasts Carney has changed his tune somewhat, signaling on Tuesday he feels little pressure to raise interest rates any time soon.
The prospect of any tightening of Canadian monetary policy, despite those still near record-high household debt levels, can only have receded.
No doubt Carney would argue that there has been no change in his position, given his view that Canada is seeing “a continuation of what is becoming a positive evolution of household debt and aspects of the housing market,” but it is hard not to conclude his tone has softened.
There may be room for the Canadian dollar, trading on Wednesday around $1.0260, to weaken back towards $1.04 per greenback in the next few months, a level not seen since June 2012, if traders conclude the outlook for Canada is not quite as rosy as they had thought.
Editing by Nigel Stephenson