Expected USD/CAD Range: 1.037 – 1.043 Update: In a major surprise to the Canadian financial markets, the Bank of Canada took its already mild hawkish bias on interest rates to a completely neutral stance. The theoretical implication is that the next interest rate move is as likely to be down as it is up. Practically, the change means that an interest rate increase is even further away than previously anticipated. The change is in line with what we have long argued is likely to be the new focus of the bank on exports under Governor Poloz (see our foreshadowing of this move here). There were other changes to the bank’s stance, including a downward revision of growth estimates but these other changes were previously telegraphed by various bank officials. The markets reacted immediately with the loonie now trading at 1.041 and up over a penny since yesterday morning. We continue to believe that the Canadian Dollar will be even weaker by year end. 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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