Expected USD/CAD Range: 1.092 – 1.098 Update: The Canadian Dollar is stronger by just a touch this morning and trading at 1.095. The focus is almost entirely on the Bank of Canada statement on Wednesday. While no one expects a rate cut, nearly all market participants seem to agree that the statement might hint at such a move or at least be more dovish than the December statement. Indeed, the market seems to have priced in such a sentiment. We do not agree with the consensus view on this one. First, we are not sure that the statement will indicate a change in the stance of the Bank of Canada. Second, we are concerned that the level of market unanimity on the issue might be setting us up for a significant reversal. We continue to believe that the Canadian Dollar will depreciate over the course of the year but would be buyers in the short term, especially into the Bank of Canada announcement this week. Most US markets are closed due to the MLK holiday. The Big Picture: The Bank of Canada remains cautiously optimistic on the Canadian economy but dropped its tightening bias in October. Indeed, at the moment, the primary concern of Governor Poloz seems to be inflation rates that are well below the Bank’s 2% target and the consequent possibility of disinflation (declining inflation rates as opposed to the scarier prospect of deflation). With concerns about elevated household debt levels and an overheated housing market still lurking in the background, the Central Bank faces an interesting challenge in balancing the need for economic growth against further increases in household debt or frothy activity in the residential real estate market. All of which brings us to the Canadian Dollar; while the level of exchange rates is not explicitly within the mandate of our Central Bank, the value of the Canadian Dollar is now implicitly in the crosshairs of Governor Poloz as possibly the only mechanism for stimulating economic activity without further burdening the household sector. Interestingly, the Governor has recently commented that the link between a stronger US economy and greater exports is not as strong as he would prefer, arguably further fueling the view that a lower Canadian Dollar is what he would prefer. In the United States, the ongoing (somewhat halting) recovery has led the Federal Reserve to begin the process of cutting back (“tapering”) its two remaining extraordinary monetary stimulus programs. 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. As a result of all of this and not surprisingly, the CAD has declined near 10% in the past 12 months and we expect it to continue an orderly and gradual decline in 2014.
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