Expected USD/CAD Range: 1.059 – 1.065 Update: The weather is cold, the trading is thin and the news is slow but the main theme of the year for the Canadian Dollar and the Canadian economy has already taken shape. How does Governor Poloz balance the risks of disinflation against those of asset inflation, especially in the real estate markets? At the moment, the Governor seems more focused on fighting off disinflation and therefore the markets are bearish on the Canadian Dollar. The recent volatility resulting from the lack of liquidity in the holiday trading sessions notwithstanding, we expect the Canadian Dollar to begin trading closer to 1.070 than to 1.060 next week. We are currently at 1.062. 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.
Account to Account
