Expected USD/CAD Range: 1.064 – 1.068
Update: The Canadian Dollar is down 20 pips and trading around 1.066. The loonie seems to have found a level and is range bound for now. It is a light day on the economic calendar both here and south of the border but at 8:15 this morning housings starts in Canada will give us another indication as to how constrained Governor Poloz may be in his fight against disinflation. If the housing market continues to dominate the Canadian economic story then the Bank of Canada’s suggestion that it may lower rates and drive the loonie lower to stimulate export growth will become increasingly not credible. On the other hand, if housing starts are starting to cool (at least relative to expectations) then expect further Canadian Dollar weakness.
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 7% relative to the USD since the beginning of the year and we expect it to continue declining next year.
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