Expected USD/CAD Range: 1.066 – 1.072
Update: The Canadian Dollar is now comfortably around the 1.070 level, the weakest level in about three years. Yesterday afternoon, the FOMC began the process of reducing its extraordinary monetary stimulus program. The Fed also announced that short-term interest rates would stay low long after the bond-buying program ends. This first step of the taper is small (5bn from each of the two programs) and the Fed went out of its way to indicate that its future path would be data dependent. The market reaction was somewhat limited but the Canadian Dollar did trade down about a penny to its current level.
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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