At the current pace of decline, the Canadian dollar could set a new record loss this year, surpassing even the damage to the currency inflicted through the global financial crisis and ensuing recession.
The loonie lost nearly a penny against the U.S. dollar on Thursday, bringing year-to-date losses up to 17 per cent, just shy of the 18-per-cent currency drop seen in 2008. The Canadian dollar fell to as low as 71.51 cents (U.S.), its weakest level in more than 11 years. Friday morning, it hit another fresh low, sinking to as low as 71.43 cents (U.S.) as Canada released a core inflation reading that came in less than economists had expected.
"I thought we could never top 2008," said Doug Porter, chief economist at BMO Capital Markets. "We've still got eight trading days to go."
The Canadian dollar doesn't have much going for it at the moment. The dive in global energy prices, the U.S. rate hike and Canada's falling fortunes relative to the United States have all contributed to a thorough trouncing of the loonie this year.
Economists are finding they can't set their targets low enough. Shaun Osborne, chief foreign exchange strategist at Scotiabank, said he thought his forecast of about 72 cents for 2016 was on the bearish side just a few weeks ago. Now, he said he sees the potential for additional downside of up to about 5 cents.
"Below that it starts to suggest some pretty dire circumstances in Canada," Mr. Osborne said. "Although it's not looking that brilliant at the moment, I don't think it's any sort of crisis."
Instead, the loonie is the casualty of a handful of potent forces – first and foremost, the oil rout. The seemingly endless growth of crude supplies has drawn oil benchmarks down toward their crisis-era lows. On Monday, West Texas Intermediate dropped as low as $34.63 a barrel.
"I still think the lead driver here is oil," Mr. Porter said.
But the latest leg in the loonie's descent has been disproportionately high relative to oil, he said. Over the past couple of weeks, the price of crude has dropped by about $5 a barrel, which might typically be counted on to lop a couple of cents off the currency. But the loonie has doubled that dip, reflecting the diverging paths of Canada and the U.S.
The Canadian and U.S. economies are traditionally so closely linked that monetary policy tends to be more or less in sync.
"We're seeing something quite different now," Mr. Osborne said. "We've had a technical recession in Canada in the first half of the year without any sort of slowdown in the U.S. It's unusual to see that. It's very much a homegrown slowdown."
The force of the oil shock and Canada's faltering economy already triggered two Bank of Canada rate cuts this year. There is the potential for further stimulus in the year ahead. Bank of Canada Governor Stephen Poloz even recently discussed the potential for negative interest rates in the event a crisis erupts.
The U.S. Federal Reserve, meanwhile, saw enough domestic economic strength to justify raising its key policy rate this week for the first time in almost a decade.
As a result, the respective bond yields of the two countries have been moving in opposite directions. U.S. five-year government bonds now yield nearly one full percentage point more than their Canadian equivalents.
That negative long-term interest rate differential relative to the U.S. pushes capital out of Canada in pursuit of higher yields, thus leading to downward pressure on the loonie.
"You'd expect the Canadian dollar to move significantly in that environment," Mr. Osborne said.
With the outlook for Canada being stability at best, an immediate relenting of the Canadian dollar's depressants seems unlikely, he said.
But another big leg downward would probably require fresh weakness in oil prices or some policy easing by the Bank of Canada. Absent that, a loonie that manages to sink much below the 70-cent mark would probably begin to attract support, Mr. Osborne said.
"We may start to see bargain hunters and value players start to pick away at the Canada dollar at those levels."