Canadian Dollar Morning Update

Expected USD/CAD Range: 1.055 – 1.060 Update: Canada’s economy grew at an annualized rate of 2.7% in the third quarter, the fastest quarterly growth rate in two years, and well ahead of a consensus estimate of 2.5%. There was a slight downward revision to the second quarter growth rate but the net result of the release is a brighter picture of the Canadian economy than most expected. Strong growth was recorded in household expenditures while exports continued to decline. With US markets in holiday mode, this is likely to be the dominant story for the Canadian Dollar for the rest of the day. The Canadian Dollar reacted immediately by gaining 15 pips and we expect it to continue to strengthen for the rest of the day.

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.