The yellow line is the % of over over (under) valuation of the Canadian Dollar based on producer purchasing power parity. This metric indicates that the Canadian Dollar is the most undervalued at any time in the last three years, except for a brief time during the crisis.
There is widespread anticipation that the Bank of Canada’s statement this week will carry a more dovish tone than the previous statement in December. Some believe that it could even carry an explicit reference to a future rate cut. We do not agree with the consensus. First, as we discuss below, not enough has changed since December to necessarily justify action. Second, both quantitative and anecdotal evidence suggests that the market is already heavily positioned for a more dovish tone and therefore the risks are to the upside for the Loonie coming out of this announcement. That is, unless we get a fairly significant and explicit change in tone, Canadian Dollar shorts are likely to be disappointed.
The key parts of the Bank’s statement from December are shown below in Italics, followed by our commentary.
The global economy is expanding at a modest rate, as the Bank expected. Although growth in several emerging markets has continued to ease, growth in the United States during the third quarter of 2013 was stronger than forecast. Even if some of this pickup was due to temporary factors, the data are consistent with the …
Where do the analysts expect the Canadian Dollar to be at the end of the first quarter? The yellow line is consensus forecast at near 1.070. The white line is the current price at 1.095. The options market implied probabilities are the curved bell line. The green bars are the distribution of analyst forecasts.
In light of the “taper debate” culminating in this afternoon’s FOMC statement, as well as signs of disinflation everywhere, we thought this might be a useful time to review Janet Yellen’s views on the topic. Here she is speaking on the topic, in an admittedly different environment, in 2009. Note the focus on the risks of inflation below 2%.
Back on September 5th of this year, we examined the relationship between futures market positions on the Canadian Dollar and the value of the loonie. At the time we argued for a short term recovery in the Canadian Dollar based on the divergence of that general correlation. Sure enough, the loonie recovered over the next several days and the correlation was restored. In light of the most recent move down by the Canadian Dollar, we thought it would make sense to reexamine the relationship. As shown below, this particular metric seems to suggest that the loonie is in for a short term recovery.
The white line is the net number of long vs short futures contracts outstanding on the Canadian Dollar. The orange line is the value of the Canadian Dollar.
1 Sentiment — Risk Reversals Risk reversals on the Canadian Dollar are right around their average level for the last 12 months at negative 0.80 (quoted in vol terms). Translation:…
Credit Suisse’s 2013 Wealth Report is out and as usual shows interesting results. Below are some highlights relating to Canada. The study can be found here.
- Canada accounts for 3% of the world’s millionaires
- There are 46,000 new millionaires in Canada since the last study a year ago
- Canada’s billionaires list shows the least mobility since 2005 of any of the G7 countries
- The average net wealth of a Canadian adult is $250,000 USD with wealth distributed nearly equally between real and financial assets
In our view, the Bank of Canada is increasingly open to a low dollar policy as part of the plan to drive growth towards investment and exports. Below are some…
There has been much anecdotal evidence in the last couple of months suggesting that the global hedge fund and investment management community is bearish on the Canadian Dollar. At the same time, every week, the Commodity Futures Trading Commission in the US releases the total number of long and short contracts on the Canadian Dollar held by futures traders. This data is generally a good proxy for the position of the investment community on the Canadian Dollar and has been showing a notable net negative position since late March of this year. For a variety of reasons, this “net position” data also tends to correlate well to the value of the currency itself over reasonable time periods. The graph below shows that correspondence; the white line is the net number of long vs short futures contracts outstanding on the Canadian Dollar. The orange line is the value of the Canadian Dollar.
Here is the interesting part: whereas in March…