Expected USD/CAD Range: 1.042 – 1.048 Update: It has been an eventful morning in the markets so far this morning. First, the ECB surprised almost everyone by lowering rates 0.25%. The Euro reacted immediately and strongly and is down over 1% against the loonie at 1.394. Indeed, a moderating of the strong European currency might have been part of Mario Draghi’s strategy. It is now becoming clear now that most developed market bankers have become focused on deflation and keeping their local currencies in check is part of that strategy. It is not quite “beggar thy neighbour” but does feel a little bit of a race to the bottom. The second surprise of the day was that the US GDP QoQ growth of 2.8% for the third quarter showed growth well ahead of consensus forecasts of 2.0%. The US Dollar reacted by strengthening across the board and is trading around 1.044 CAD, up 20 pips over yesterday’s close. We expect further US Dollar strength today and for the rest of this week. 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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