Expected USD/CAD Range: 1.031 – 1.037 Update: The Canadian Dollar is weaker this morning by 0.2% and trading around 1.034. The loonie had not seen that level since mid October. There are a variety of factors driving the Canadian currency lower. First, the speech by Bank of Canada Senior Deputy Governor Tiff Macklem was decidedly dovish and seemed to be moving down GDP targets for the year. Also, the topic of the speech was exports and specifically the decline in competitiveness for Canadian exporters. Mr. Macklem blamed most of the decline in the competitiveness in Canadian exports on the rising value of the Canadian Dollar. While he was discussing longer term trends, this kind of thinking does give some credence that within the Bank of Canada there is some support for a low-Dollar policy to support exporters. The second factor driving the loonie and all other risk assets lower is the shutdown of the US government, and in particular, the growing fear that unless a solution is found soon, this debate will get tied into the much more serious debt ceiling issue coming up later in October. Finally, the weaker overall commodity complex is also putting pressure on the Canadian Dollar. 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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