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Year in review: Canadian Edition

The events that shaped Canada’s financial markets in 2015.

Canada’s financial markets experienced significant volatility in 2015, primarily because of the sharp decline in crude oil prices, which had a negative impact on almost every area of the Canadian economy. Here’s a closer look at how this theme played out over the year.
1. Oil prices plummet
Crude oil prices began their steep descent in the second half of 2014, largely as a result of strong supply and weakening global demand, particularly from China. This trend continued throughout 2015. The West Texas Intermediate price rebounded somewhat toward the middle of the year, hovering around US$60 to $65 per barrel from May to July, compared to just under US$55 in January. However, prices plunged below US$40 in late August, reaching their lowest point in over five years. For the most part, prices stayed in the US$45 to $50 range for the remainder of the year.1 
This had a significant impact on Canada’s resource-dependent economy. Exports faced their largest decline since January 2012, Canada’s trade deficit widened, the Bank of Canada downgraded its growth outlook and the country was in a technical recession in June and July. The International Monetary Fund also lowered its growth outlook for the Canadian economy, citing lower oil prices as a catalyst.
2. Loonie tumbles
Few market participants were surprised that the loonie followed oil prices lower. The Canadian dollar started the year on relatively solid footing, trading at about US$0.86. This changed drastically as the U.S. economy strengthened over the year, while the Canadian economy struggled with oil prices that appeared poised to stay lower for longer. The Canadian dollar fell below US$0.75. in September, reaching an 11-year low, and rebounded only slightly.2
3. Bank of Canada cuts interest rates
The Bank of Canada cut its overnight lending rate by 25 basis points in January and again in July, dropping the key interest rate from 1.00% to 0.50%. The Bank of Canada cited lower oil prices and their impact on Canadian economic growth and inflation as the main driver of the cuts. At the same time, projections showed that Canada’s real gross domestic product contracted somewhat in the first half of the year, which put downward pressure on inflation.
4. Financial markets struggle
The third quarter of 2015 marked the worst quarter for global equities in four years. Out of 24 developed stock markets, Canada was ranked as one of the worst performers. Bond yields also declined, creating a challenging environment for Canadian investors overall.

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