Canada Set To Unleash Negative Rates As Oil Patch Dies, Depression Deepens

Tyler Durden's picture

This Wednesday, the Bank of Canada has a decision to make.

Canada’s oil “dream” is dying thanks to the inexorable slide in crude prices and as the IEA made clear earlier today, the pain is set to persist for the foreseeable future as the world “drowns in oversupply.”

“Lower for longer” has hit the country’s oil patch hard. We’ve spent quite a bit of time documenting the plight of Alberta, where job cuts tied to crude’s slide have led directly to rising suicide rates, soaring property crime, and increased food bank usage (not to mention booming business for repo men).

Adding insult to injury for Canadians is the plunging loonie. Because the country imports most of its fresh fruits and vegetables, the weak currency has triggered a sharp increase in the price of many items in the grocery aisle as documented in a hilarious series of tweets by incredulous Canadian shoppers.

The question for the Bank of Canada is this: is the risk of an even weaker loonie worth taking if a rate cut has the potential to head off the myriad risks facing the economy?

We’ll find out what the BOC thinks tomorrow, but in the meantime, analysts have weighed in. JP Morgan’s Daniel Hui says CAD needs to fall further lest producers should simply close up shop. "[W]ith West Canada Select (WCS) now sitting just a dollar above the average per-barrel operational cost of $20 (Canadian), the risk is that any further decline will cause a whole new host of spillovers including potential shutdown and retrenchment of energy extraction and exports (with its attendant growth and balance of payment effects) or the potential of highly leveraged companies running operational losses, and the more contagious financial impact that might have in Canada, with broader spillovers."

None of those outcomes are particularly palatable. If the loonie continues to plunge however, it would act as a kind of shock absorber (producers’ costs are predominantly in CAD terms whereas the crude they sell is obviously denominated in USD), keeping CAD-denominated prices above the marginal cost of production.

"One of the few scenarios that would keep bitumen producers above marginal cost amid a further decline in global energy prices, is for CAD to depreciate substantially and at a much higher beta to oil price than has been the case in the past 18 months," Hui adds, driving the point home.

But this is a Catch-22. The BOC can cut and drive the loonie even lower thus allowing zombie producers to keep pumping and thus prevent still more oil patch job losses, but a falling CAD may have undesirable knock-on effects, like reduced consumer spending, for instance. Additionally, if uneconomic producers keep drilling and pumping, they’re just digging their own grave by contributing to an already oversupplied global market.

In short: there’s no “right” answer. “Economists are united in one view, that new plunges in oil prices, in the Canadian dollar, and weaker global financial conditions, make the Bank of Canada's policy interest rate decision Wednesday a very close call,” MNI writes.

"We now are looking for a rate cut next week," Bank of Montreal Chief Economist Douglas Porter told Market News. "We believe that the balance of weight has slightly tipped in favor of them going" for a rate cut, he added, pointing out that the market is pricing in a 50-50 chance of a BOC action this week.

Royal Bank of Canada assistant chief economist Paul Ferley, doesn’t agree. "We think that Governor (Stephen) Poloz will maintain his confidence that growth in exports will counter weakening business investment and he will hold the rate steady," he says.

Perhaps, but as we noted early last month, the BOC has already hinted that Europe’s not-so-grand experiment in the Keynesian Twilight Zone known as NIRP may be about to cross the pond. “The effective lower bound for policy rates is around -0.5%,” governor Stephen Poloz said in December, setting the stage for negative rates in Canada.

For their part, IceCap Asset Management says NIRP is a virtual certainty for the BOC. Here’s IceCap’s straightforward, bullet point roadmap for Canadian monetary policy:

  1. Canadian economy to be in recession in 2016

  2. Bank of Canada will be at 0% interest rates in 2016

  3. Bank of Canada will be at NEGATIVE interest rates in later 2016

  4. Bank of Canada will be PRINTING MONEY in later 2016

Ahead of Wednesday’s decision, Barclays is out with a preview and sure enough, NIRP makes a cameo.

“The BoC would need to cut at least 50bp this year to partially counteract the continued slide in crude oil prices,” the bank begins, adding that although the price of Western Canadian Select (WCS) has fallen by half since the publication of the BoC’s last Monetary Policy Report, “this has been only partially offset by the 8% nominal multilateral depreciation of the CAD.”

To fully offset the effect on GDP, Barclays says “the BoC would need to cut policy rates by at least 50bp in 2016.”

Yes, by “at least” 50bps, and that’s assuming oil prices don’t plunge further.

Of course 50bps puts the BOC at zero, so when Barclays says “at least”, they mean NIRP is likely on the way. To wit:

The central bank has room to act even if rates hit zero. A 50bp cut in 2016 would bring the overnight rate to zero. The experience of countries like Switzerland, Sweden, Denmark and the euro area has taught central banks that zero is not the lower bound. The BoC estimates that the effective lower bound for Canada could be around -50bp, giving room for further cuts if needed. Without the immediate worry of hitting the effective lower bound, the central bank might be more willing to ease sooner rather than later.


There you have it. Of course it's difficult to see how 100bps of theoretical policy flexibility will be enough to keep the shut-ins from starting in the oil patch especially considering there's only a CAD1 cushion above the marginal cost of production and considering the outlook for oil prices is particularly bleak now that 500,000 b/d of new Iranian supply are coming to market. 

As for what the BOC does in the event Poloz hits the lower bound of -0.50% and the loonie still needs to weaken to offset the ill effects of declining crude, we'll leave you with one indelible image that should serve as a harbinger of what's to come...

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WTFRLY's picture

2016 is getting really exciting, real fast. Stand back, it's gonna blow lol.

LawsofPhysics's picture

Governments around the globe have always SUBSIDIZED energy and food. Tax breaks, SNAP programs, government grants or free leases for drilling etc.

Want to see some real shock? END ALL THE SUBSIDIES and let's see what the REAL price of energy and food is!!! Last time I checked there were 8+ billion competing for a decent standard of living. Food and energy play a massive part of that...

hedgeless_horseman's picture



END ALL THE SUBSIDIES and let's see what the REAL price of energy and food is!!!

Idiots believe the propaganda that it is the farmers being subsidized, and not the eaters.

Soul Glow's picture

There's one born every second.  

Most of whom turn out to be Keynesian.

Herd Redirection Committee's picture

On the upside, this is will provide a lot of unemployed, desperate, young men, for the upcoming war!  Yay!

And if I could post pictures, I would post a pic of a woman in labor shouting to the US: "YOU DID THIS TO US!"

Durrmockracy's picture

loonies for nothin' and dicks for free.

red red wine's picture

Close and end the Free Trade borders......Canada can be self sufficient within one year.

DownWithYogaPants's picture

Subsidies drive the price of items up .......NOT DOWN

Lore's picture

This is moronic. They're prepared to put the nation's capital and the purchasing power of the Canadian people on the proverbial chopping block in order to prop up a few oil companies with broken business models, all for the sake of a dollar's profit per barrel?  IS THIS A FUCKING JOKE?!? 



Joe Trader's picture

They're devaluing the canadian dollar so that the losers in eastern canada with their manufacturing industry can see increased demand.

it was also eastern canadians' idea to increase our debt burden by voting liberal. so much is wrong with eastern canadians' minds.

Lore's picture

Of course you're right.  And it's equally obvious that you don't create demand in a nonexistent market by debasing your currency.  That just kills the consumer and saver and destroys the capital that remains.  Markets need to be allowed to work, or the hole just keeps getting bigger and bigger!

Poloz and his team are more intelligent than a first year Econ student.  Now's the time to DEMONSTRATE IT.


rockface's picture

Government spending does not increase demand.  That's the brilliant idea that bankrupted the world Poloz and True Dope seem to be eager to do it again.

unrulian's picture

He's a dick and only half right...Ontario and Quebec are central not eastern you western douchebag, you're going to blame all of Canada's woes on a liberal government that was sworn in a month ago? you're just pissed you can't sell your $700k bungalo in Edmonton. We as Canadians made our bed years ago, I think it will however look good on the Liberal asshats as they will wear this crisis as it gets worse.

general ambivalent's picture

What he doesn't know is that he's also Upper Canadian. Not a big difference between Torontoseurs and Calgoseurs. Anything West of Gaspe is basically the California of Canada.

Keep voting Progressive Reform Party, binary douche. You all have hard-ons out there in Canmore for the faggot zionerds bred in a test tube?

Lore's picture

Regional generalizations notwithstanding, I disagree with you about Trudeau.  His first few weeks are a disaster.  He shows blatant ignorance and/or disregard for the most basic principles of good fiscal and economic policy.  He is a walking gaffe.  He is a child in matters of foreign relations and international policy.  He is narcissistic, socialistic, and just plain dumb. 

The deficit was already unacceptable before the Liberals got elected, yes, but when it was announced that revenue would suffer from the current energy price war, he just shrugged it off and went ahead with his reckless, idiotic spending ambitions, throwing around money that doesn't exist like a drunken sailor. HIS deficit is soaring. 

With his latest junkets, it is clear that he panders to the NWO "Agenda 21" and will use the unfolding train wreck as justification for federal Carbon Tax.  Remember NEP.

False pretexts notwithstanding (!), you don't raise taxes in a recession.

In my opinion, Justin Trudeau and his Liberals constitute a clear and present danger to the people of Canada. The outlook is horrible.

geroldfelix's picture

Stupid Canadians just elected a Liberal government headed by Justa Truedope who believes budgets balance themselves and it's the government's job to spend, spend and spend.

FIAT CON's picture

Remember HArpers home town was Calgary. It's probably  agreat thing we got rid of him or this could be a lot worse. Just for the record I am no fan Of the Liberals either.


Seer's picture

Even without all of that money from China (ans SE Asia) coming on shore?

And the debt?

But, yes, I've said so for years now, there are three countries that could maintain some semblance of what they are, and the litmus test would be to close all borders (in and out, goods as well as people).  Canada, US and Russia are those three countries: China could have had a chance if they hadn't wildly pumped up their people's expectations over the past decade or so (folks there really have little clue that the promised growth and its salvation isn't really there).  Eventually, however, the continued path/push for growth would hit a brick wall even for these countries.

Abbie Normal's picture

"Canada can be self sufficient within one year."

Enjoy your root vegetables and non-existent fruit for the better part of eight months every year.

Deathrips's picture

Great news...the refugees are great for economic stimulus.

CBC told me. So did about 100+ parrots.


They are a Crown Corporation in Canada...It is OWNED by the crown. Just speculation however England in deep shit and many "commonwealths:" are being sacrificed.



Durrmockracy's picture
Durrmockracy (not verified) Deathrips Jan 19, 2016 1:39 PM

I thought nobody could possibly be any dumber than the CNBC.COM crowd... then I went to CBC.CA....

Babalooee's picture

ZH is vying for dumbest these last several years. Initially this site seemed to know the fight to be fought and now, even though there may still be plenty to fight, the Tylers are lost, resorting to the constantly old trick of constant exaggeration. Save the term "depression" for the real deal. 

PTR's picture

I'm sorry.  You said "ZH."  For a moment I though you said Business Insider*...


*which still used to be decent until it went hufpo.

jackinrichmond's picture

agreed !

the 'experts' have been predicting canada's demise for over 8 years now. 

canadians joke about how little americans know about us.  

i like z/h, but some of their contributers are real drama-queens with no knowledge of canadian economics or financial systems.

..but people will believe what they wanna believe, i suppose.  

Seer's picture

So, how about you educate all the ignorant here as to how Canada's economics (system) is so magical?

CAD/USD at $0.69 [USD].

US just raised interest rates (well, yeah, it's more of a gesture, but then again it was still raised).  Canada is now talking about reducing interest rates, to perhaps negative territory.  And with this move signals a BIG "BUY ME, I"M FOR SALE," which is fine, but please tell me what exactly it is that Canada has to sell (why should you get my USD)?  Maybe some more money flowing in from Asia (until China really clamps down on the outflows)? (North Vancouver seems bought up; maybe Richmond is next?)

BTW - Thanks for the cheap oil!

BTW2 - Those full-recourse mortgage loans up there are going to hurt. (US went through it's mortgage crisis, and though ugly, and still happening [though at a much slower pace], Canada has not- a greater pound of flesh will need to be paid)

U4 eee aaa's picture

They keep screaming about how the oil patch represents only 6% of GDP. So why do you cut the currency by 30% in order to protect 6% of your economy? You don't. This doesn't add up. I can see that when your currency is pressured you need to raise rates to protect it. People want a reason to buy into your currency, especially if it is heading down. The only way you wouldn't raise rates is if you had a debt bubble in the country that you couldn't raise rates for fear of popping said bubble.

This is all about protecting debtors and the banks. Once again, consumers are being thrown under the bus for the banks and their profligate debt slaves

beemasters's picture

Well, isn't bcos of the rising USD which has always been predicted to collapse at ZH "any moment now"?

When there is uncertainty in the market, there are no attractive option for investors to run to but the USD. It's the least ugly of the ugly sisters. Hence the strength.

general ambivalent's picture

You just used the 'Yellen raised rates' argument in a discussion on stupidity, and somehow got upvoted...

Gregory Poonsores's picture
Gregory Poonsores (not verified) Babalooee Jan 19, 2016 6:03 PM

Like everything you read, see, or hear, be prepared to filter the bias.

Taking everything here as solid truth would be as stupid as watching the MSM every day and believing it.


Holleyman's picture

CBC is nothing but a piece of shit leftest rag that sucks off the tax payers tit to prop up "progressive, left leaning" idioticy and suck the balls of the liberal party leader of the day.  I don't want to see Canada go bankrupt but would consider it if it would make the CBC disappear.  I fucking hate that waste of time and money. I wish ill of everyone employed by that white elephant.

Justin sucks ass

johnconnor's picture

Right, because nothing boost the economy and the wellbeing of fellow Canadians like bringing thousands of unskilled, uneducated rapists and child molestors, that will be getting free housing, free healthcare and a free asistant-salary

Deathrips's picture

Tis only fair they bombed those syrians with white guilt....Its for the children.


How long till Canada is a full blown police state? Not long. They have no spine, no guns, no clue and ......



bluskyes's picture

no guns? you might be in for a surprise if you come walking into a house un-announced.

Global Hunter's picture

in rural Ontario we just assume every house has guns.  some don't but probability is high.

new game's picture

one thing for sure is i won't be coming north anytime soon. visited your fucking draconian country once(circled lake superior, camping ect.) and no guns allowed. so, i camp with loonies running around, no equalizer allowed, no thanks.

and the border fucks, ha...

Seer's picture

Well, I don't have that much of a problem with the hassles of bringing in firearms into Canada.  That is, I don't really have a need.  Some of my relatives go up there to hunt and are able to bring their rifles w/o any problems.

My concealed weapons permit was only good for my local area- should I complain  that it doesn't apply elsewhere?  Don't know..  Anyway...

What really bugs the shit out of me is getting asked by these border "guards" not if I have any guns in my vehicle BUT what kind of guns do I have AT HOME!  No fucking shit, I've been asked this!  Can any Canadian here that has traveled cross border state whether any US border guard has asked them a similar question?

roadhazard's picture

When they ask you what kind of guns you have tell them, loaded.

general ambivalent's picture

Holy fuck, a definite case against guns is how pussy people become without them. Like the Americans who cannot be five feet from a gun at any time, then shit themselves when a wolf howls 15 miles away.

gatorengineer's picture

BS, 150k possession licenses in 14 million, a tad over 1% gun ownership

Nice try and thanks for playing....

Canada / France / Greece will be in a dead heat for the most failed state in 2016....  So far the answer from all three is more socialism.  America may also go that rout be we wont know till November.

Haole's picture

That's 560K people total lisensed to possess and/or acquire firearms.  Doesn't account for the "outliers" who never have any intention of consenting to "lisensing".


gatorengineer's picture

the 560k is for the country.  out of 36 million or 1.%

I believe that there is a stiff penalty for failure to comply.... and you certainly cant buy ammo


Haole's picture

That's 560K for Ontario alone.

Do you see that bolded number (1,989,181) in the bottom right corner of the chart?

Take some reading lessons, fuckin' hell...

Tinfoil Hat's picture

I order milsurp by the crate. Home delivered.  Go to any Cabella's and there's ammo by the truckload.

Tumbleweeds's picture

We all know that moar guns = better economy; better safety; more freedom. That's what I was taught in economics classes and law school. Nothing better than guns for proving your sanity.

FIAT CON's picture

NONE of those charts tell how many guns are in canada, some of these charts are for lisences to own guns, Then another chart states how many restricted and prohibited guns ie hand guns and restricted firearms. Rifles and shotguns are not in the charts at all because they do not have to be registered.

 My guess is approx 30M guns in Canada, so don't go thinking we are unarmed.

 Most guy's I know have mutiple guns as I do...

mtl4's picture

I have no idea where this idea nobody in Canada has guns is from, out east everyone and his brother has a cabinet full of rifles/shotguns........maybe they are just referencing the guns in Quebec's registry.

Haole's picture

Good point, there is no registry aside from Quebec and non-restricted firearms fly off the shelves every day.

2 million PAL and RPAL holders in the country doesn't put a dent into the numbers of firearms that are actually possessed.