Expected USD/CAD Range: 1.092 – 1.098
Update: The Canadian Dollar is now down nearly 3% for the year and at a 4 year low. While much of the weakness has been due to general US Dollar strength, it is worth noting that so far in 2014 our loonie is the worst performer amongst the majors implying that there are domestic factors at play. Indeed, there are multiple reasons for the weakness, including expected strength in the US economy, indications of a quick taper from the FOMC and a Bank of Canada that is seemingly increasingly focused on the spectre of disinflation and viewed internationally as dovish.
This morning, the picture was clouded by employment data in the US and Canada. Both countries underperformed substantially relative to expectations. The result has been US Dollar weakness against all majors except the lowly loonie which underperformed even the weakened greenback. We are now at 1.094.
The Big Picture: The Bank of Canada remains cautiously optimistic on the Canadian economy but dropped its tightening bias in October. Indeed, at the moment, the primary concern of Governor Poloz seems to be inflation rates that are well below the Bank’s 2% target and the consequent possibility of disinflation (declining inflation rates as opposed to the scarier prospect of deflation). With concerns about elevated household debt levels and an overheated housing market still lurking in the background, the Central Bank faces an interesting challenge in balancing the need for economic growth against further increases in household debt or frothy activity in the residential real estate market.
All of which brings us to the Canadian Dollar; while the level of exchange rates is not explicitly within the mandate of our Central Bank, the value of the Canadian Dollar is now implicitly in the crosshairs of Governor Poloz as possibly the only mechanism for stimulating economic activity without further burdening the household sector. Interestingly, the Governor has recently commented that the link between a stronger US economy and greater exports is not as strong as he would prefer, arguably further fueling the view that a lower Canadian Dollar is what he would prefer.
In the United States, the ongoing (somewhat halting) recovery has led the Federal Reserve to begin the process of cutting back (“tapering”) its two remaining extraordinary monetary stimulus programs. Globally, the commodity boom has ended (or is at least sputtering). Relatedly, Chinese and other emerging market economies have slowed notably and while some of the data from China is encouraging, it is becoming clear that sub 8% growth in China is here to stay.
As a result of all of this and not surprisingly, the CAD has declined over 7% in 2013 and we expect it to continue an orderly and gradual decline in 2014.
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