Expected USD/CAD Range: 1.028 – 1.032 Update: The Canadian Dollar is weaker against the US Dollar and trading at 1.031 and also trading down against all other major currencies. The weakness is attributable to the first government shutdown in the United States in nearly two decades. Interestingly, the loonie is down more relative to peers than the greenback itself, which suggests that there is still wisdom in the old saying that “when the US sneezes, Canada catches a cold”. In fact, the Loonie is the weakest of the major currencies since Friday and the only one trading down against the US Dollar. See table below for the performance of major currencies against the US Dollar since Friday. The Canadian Dollar reacts negatively to such events because, outside of the US, a government shutdown has the most direct fiscal impact in Canada. It is also still the case that in times of uncertainty (even when that uncertainty emanates from the US) the market views the Canadian Dollar as a risk asset. This latter effect is not quite as impactful as it used to be as the relative outperformance of the Canadian economy since the 2008 crisis has led some to view the Canadian Dollar as a safe haven. But the net impact of all these flows and views remains that risk (like uncertainty around fiscal events in the US) is still negatively correlated to the value of the Canadian Dollar. We expect the fiscal issues in the US to be resolved in under a week and therefore would suggest that short term sellers of the US Dollar against CAD take advantage of the situation. The Big Picture: The commodity boom has seemingly 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. At the same time, the ongoing (admittedly halting) recovery in the US will sooner or later lead to a tapering of the Fed’s bond purchase programs. Closer to home, Canada’s new central banker is optimistic about our recovery but shows no inclination towards raising rates in the next several quarters. As a result of all of this and not surprisingly, the CAD has declined over 3% relative to the USD since the beginning of the year. We expect the CAD to be even lower relative to its US counterpart by the end of the year.
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