Expected USD/CAD Range: 1.062 – 1.068 Update: Sentiment on the Canadian Dollar continues to be decidedly negative. There is now a minority but apparently growing view that Poloz is more dovish than the market had originally realized and that his focus on keeping inflation above the lower end of the stated desired range may lead to an interest rate cut. As a result of this renewed focus on the Bank of Canada, tomorrow’s monthly interest rate announcement is shaping up to be an interesting event. While no change in rates are expected, the Canadian Dollar bears will be looking for affirmation of their view in the text of the release. 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. We expect the CAD to be even lower relative to its US counterpart by the end of the year.
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