market updates market news Monthly Market Outlook
October 2014
The penultimate quarter for 2014 was not kind to Loonie bulls, with USDCAD swiftly reversing course from the depressed levels seen in June, managing to retrace all of the losses accumulated over the previous quarter as capital flows bought a one-way ticket south of the 49th parallel. The underlying weakness in the Loonie compared to the greenback it more a function of changing expectations towards the global interest rate environment rather than fundamental weakness from a domestic perspective, though the swift change in the outlook surrounding global monetary policy has wreaked havoc on market participants betting on the prospect of a continuation in depressed volatility. Despite the approximate decline of 5% in value against the big dollar, the Loonie was one of the best performing developed market currencies over the third quarter, gaining against the EUR, AUD, GBP, and JPY. While the Loonie was the ‘cleanest dirty shirt’ outside of the United States over the third quarter, the road ahead from a domestic perspective is still one requiring careful navigation from policy makers at the Bank of Canada. Although there have been some encouraging gains for Canadian exports, the sector as a whole has yet to see the robust recovery associated with a pickup in demand from a weaker Loonie and better economic indicators from our main trading partner. Along those same lines, further work needs to be done transitioning the economy from one heavily reliant on consumer
demand and household debt, to one of business investment and export growth. Credit debt to disposable income continues to remain elevated
“The Loonie was one of the best performing developed market currencies over the third quarter, gaining against the EUR, AUD, GBP, and JPY.”
October 2014
at 163.6%, which leaves consumers at heightened risk in the event of another economic downturn or unexpected interest rate hikes, increasing the likelihood further progress in Canada’s economic recovery will have to be driven by factors outside of consumer spending. As such, we feel additional macro-prudential policies towards combatting skyrocketing property prices will be the favoured over interest policy in the short-tomedium term, as the BoC recognizes “some degree of monetary stimulus will be required even after the output gap is closed.”
When categorizing the domestic outlook for monetary policy as being firmly entrenched in the neutral position, and combining that with the expectations the Federal Reserves’ tightening cycle will being somewhere in the middle of 2015, it is hard to argue against the prospects for a higher USDCAD from these levels. The being said, we feel the recent rally higher in USDCAD is close to reaching its short-term objective, as in our view the market has overpriced the certainty of the Fed’s interest rate dot chart and the weight of the regional Fed President’s hawkish views. Yellen and Dudley don’t look ready to shed their dovish feathers just yet, and thus could take some of the momentum from the greenback parabolic rise over the next few months.
“Although there have been some encouraging gains for Canadian exports, the sector as a whole has yet to see the robust recovery associated with a pickup in demand from a weaker Loonie and better economic indicators from our main trading partner.”