Account to Account
Canadian Dollar Update
Expected USD/CAD Range: 1.102 – 1.110 Update: The Canadian dollar has been showing some signs of life for the last couple of trading days and is now trading at 1.105. The minor recovery has been due to (a) some strong economic releases (this morning’s Industrial Production release was well ahead of estimates), (b) optimism for the Keystone XL pipeline’s chances of approval based on a State Department release, (c) the rumour that two large US asset managers have terminated their short CAD positions, and (d) a general sense that, for now, the sell-off in the loonie is overdone. We agree with that last sentiment and think that the US dollar has peaked in the short term against the Canadian dollar. Our longer term view (below) continues to be that the US dollar will appreciate moderately over the next 12 months. 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. The Bank went as far as explicitly referencing Canadian Dollar strength as a problem in its most recent Monetary Policy Report. Interestingly, the Governor has 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.