Page 1

market updates market news June 2014

Monthly Market Outlook The month of May was an extremely uneventful one for the Loonie, with many market participants thinking the summer doldrums had set in early, as a result of USDCAD remaining within a tight 1% range for the course of the month after the pair pierced the 1.09 level to the downside. The resiliency of the Loonie has been somewhat surprising given the rocky start to the year for the commodity-linked currency, yet its strong performance compared to its American counterpart has been more to do with overall weakness in the US dollar rather than a resurgence in economic prowess north of the 49th parallel. The disappointing Q1 experienced in the United States put downward pressure on fixed-income yields as investors questioned whether the harsh winter weather merely postponed economic activity, or the American economy wasn’t on as solid ground as participants had previously expected, allowing the Loonie to claw back some of its sharp losses felt near the end of 2013 and now has USDCAD trading at lows not seen since early January. To say that the Loonie’s almost 4% appreciation in value against the USD since mid-March is exclusively based on the softness in the American unit is a little unfair, as there have been some modest improvements in the overall economic situation in Canada. The steep drop in the Loonie earlier in 2014 has given a slight boost to export growth, which in turn helped Canada post its first quarterly international trade in goods surplus since the end of 2011, and contributed to the narrower than expected current account deficit posted in Q1.

“The resiliency of the Loonie has been somewhat surprising given the rocky start to the year for the commodity-linked currency.” In addition, headline CPI has moved back into the mid-range of the Bank of Canada’s targeted band, easing some of the concern the BoC has around the economic risks of persistently low inflation.

June 2014

That being said, to opine that the road to recovery is underway and that it’s all “blue-skies” for the Loonie would be misguided, as even though there have been some positive developments, the key will be whether or not this momentum can be sustained. For example, export growth ended up moderating in March after a promising February, and the majority of the price gains for April’s CPI were in the form of increased energy costs, which are notorious for being volatile and influenced because of cyclical factors (the core reading stands at 1.4%.) In addition, just like their neighbours to the South, Canada also saw GDP figures in Q1 miss estimates, coming in with growth of only 1.2% on an annualized basis.

Because of these factors it is likely that Stephen Poloz doesn’t materially deviate from his neutral stance towards monetary policy at the upcoming Bank of Canada policy meeting during the first week of June, potentially highlighting the fact that a weaker Canadian dollar would be preferable for export growth and that Canada is not out of the woods yet in terms of getting inflation back on track. While there is a high probability that the BoC announcement could shake the USDCAD pair from the slumber it exhibited during the month of May, a re-test of the highs in USDCAD will have to be generated by a more robust second quarter in the US, as the mediocre economic performance in Canada has already been well priced into the markets.

“The steep drop in the Loonie earlier in 2014 has given a slight boost to export growth.” With volatility for the pair sitting at record lows, it is unlikely the market will remain complacent for too much longer, giving businesses with exposure to USDCAD a chance to take advantage of attractive trading opportunities should volatility pick-up.

Cambridge Mercantile Group  

June 2014 Market Outlook