market updates market news Monthly Market Outlook
November 2014
If the previous few months are any indication of what is in store for currency markets into the end of the year, market participants should be ready to batten down the hatches as 2014 draws to a close, with volatility likely to remain elevated. A number of global macro-economic developments have placed the greenback on a steady upward trajectory since early in the third quarter, so it is no surprise to see the Loonie limping into the latter half of the year after collapsing under the pressure of a stronger USD. Monetary policies from central banks in developed economies are in clear-cut divergence at the moment, with the European Central Bank and Bank of Japan both looking to expand their balances sheets at a much faster pace than previously, at the same time when the Federal Reserve has completed its balance sheet expansion and is evaluating when might be the best time to begin a cycle of monetary policy tightening. The expansionary policies from the ECB and BoJ have put massive downward pressure on the Euro and Yen as the respective governments aim to get their economies back on track, which by extension has boosted the greenback across the rest of the majors as investors seek to increase exposure to the big dollar. While there is sure to be some wobbles in the greenback as participants gauge when the first rate hike will come from the Fed based on the incoming economic data points, there is little to suggest the rally in the dollar has run out of steam – though temporary breathers are likely to emerge from time to time. Headwinds for the Loonie over the second half of 2014 have been voluminous, though one of the major causes for the set-back has been the drastic drop in oil prices since the summer, culminating in the most recent flush after the Saudi’s repeatedly stated they would welcome lower oil prices for a period of time. It has been theorized the move from one of the most influential members of OPEC is an effort to boost market share and push out some of the higher-cost supply, taking a loss leader approach to pricing in North America as a result. Though the spread between Canadian crude prices and the American WTI benchmark have tightened up during the collapse in international oil prices, the relative value
offset has failed to stem the outflow of capital from Canada, and the commodity-linked currency has taken a beating as a result. While we think a trough for oil prices is in the process of being carved out, a return to tripledigit oil in the short-term is unlikely, and thus a rebound
“...market participants should be ready to batten down the hatches as 2014 draws to a close, with volatility likely to remain elevated.”
November 2014
will provide little long-term relief for the Loonie. A Republican victory in the senate and control of both chambers in Congress may provide the last second push to drive the Keystone XL decision into the end zone; however the resulting boost to oil prices will be minimal, making the bigger issues for the energy sector in Canada how to get product safely and efficiently to Asian markets. 2015 has the potential to be a big year for Canadian energy markets, though it will take cooperative from both the Federal and Provincial governments to make sure Canada doesn’t fall behind the energy-exporter curve.
Domestically, the Canadian economy is having a hard time hitting its stride, with exports muddling through soggy international demand but being propped up by a weakening domestic currency. The ongoing transition from an economy heavily contingent on consumer based spending to one more reliant on business investment and capital spending has yet to materialize, and has handicapped the Bank of Canada into leaving monetary policy on the dovish side of the neutral spectrum. The central bank has not shied away from highlighting the risks the economy faces from elevated levels of consumer debt, yet realizes there is likely at least two years before the economy is back to full capacity, and thus warrants the current monetary stimulus of low interest rates that are currently in place. The incoming data points have corroborated the mediocre economic assessment, and thus give little to suggest the Canadian economy is at a turning point and the slide against the greenback has come to completion. That being said, while there is likely more pain to come for Loonie bulls in the short-term, we don’t foresee another 10% drop
“2015 has the potential to be a big year for Canadian energy markets, though it will take cooperative from both the Federal and Provincial governments to make sure Canada doesn’t fall behind the energy-exporter curve.” in the value of the CAD like we have over the course of 2014, as the flow-through effects of a stronger American economy will help underpin Canada’s export sector and should help defend another extended collapse. In short, the upcoming few months will continue to be a choppy trading environment for USDCAD, and will therefore see more comprehensive FX risk management strategies outperform strictly passive ideology.