Expected USD/CAD Range: 1.053 – 1.059 Update: The Canadian Dollar is back at near three month lows as the oil trades down after an agreement was reached between Iran and world powers to halt the advancement of Iran’s nuclear activity in exchange for limited sanctions relief. The loonie is down nearly half a penny and trading at around 1.056 to the US Dollar. The US Dollar is stronger across the board as oil importing currencies globally benefit from the decline in oil prices. While the agreement with Iran does not bring any new oil to the market in the next several months, it is widely viewed as reducing geopolitical risk and the risk premium in oil prices. We believe that while in the long run this deal may change the dynamics of the geopolitical situation in the Middle East, the backlash against this deal may manifest itself in ways that dampen the impact on oil prices. As such, we think the US Dollar sellers should take advantage of the opportunity. 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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