Expected USD/CAD Range: 1.038 – 1.046
Update: The Canadian economy grew 0.3% in August, well ahead of a consensus estimate for 0.1%. While we believe that in the longer term the Canadian Dollar will depreciate (see “The Big Picture” below), given the accumulating evidence of the relative strength of the Canadian economy, the slide of the loonie might be reversed in the near future in response to this latest data point. Indeed, the Canadian Dollar is up 50 pips since yesterday’s close and at 1.043. In the short term, we expect the Canadian currency to continue to firm up against its US counterpart.
The Big Picture: Canada’s new central banker is cautiously optimistic about the economy but shows no inclination towards raising rates in the next several quarters. In fact, the low dollar policy being pursued by the bank suggests no interest rate moves until 2015. 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. 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. As a result of all of this and not surprisingly, the CAD has declined over 6% 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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