Fx flash weak cad not for long 25 oct 2016

FX Flash

Group Economics

Macro & Financial Markets 50 Research 40 30 20 25 October 2016 10 0 -10 -20 -30  Jan-10 CanadianJan-11 dollar reacts to BoC governor Poloz comments Jan-12 Jan-13 Jan-14 Jan-15 Jan-16

Weak CAD not for long

Roy Teo Senior FX Strategist Tel: +65 6597 8616 roy.teo@sg.abnamro.com

 Further monetary stimulus complicated Change in full is time jobs '000 3mth avg (rhs)  Bank of Canada renews 2% inflation target; CPI (lhs) measure changed Change in labor force '000 3mth avg  Canadian dollar to recover as crude oil firms; rate cut bets fade

Canadian dollar reacts to BoC governor Poloz comments Overnight, the Canadian dollar (CAD) strengthened by more than one cent to 1.3280 against the US dollar after Bank of Canada (BoC) governor Poloz told lawmakers in Ottawa that the best plan for the central bank is to wait for the next 18 months or so.

This supported the CAD as market speculation that the BoC may resume its easing cycle has increased recently. However the recovery in the CAD faded after governor Poloz clarified that the 18 months reference was in relation to when the output gap is expected to close, rather than the outlook for monetary policy.

Further monetary stimulus is complicated Bank of Canada governor Poloz explained that there have been two developments that led them to downgrade their outlook for the Canadian economy in their recent monetary policy assessment. The first is a weaker outlook for exports. About half of it is due to weak global trade and composition changes in US demand. The rest is unclear and is assumed to be longer term structural issues such as lost export capacity and competition. The other factor for weaker economic growth outlook is due to federal government’s macroprudential measures to promote housing market stability. The latter is estimated to slow economic activities by about 0.3ppts at the end of 2018. On balance the current setting for monetary policy remains appropriate as the government stimulus earlier this year has eased pressure to increase monetary stimulus. In addition, Poloz stated that the impact of any interest rate reduction is less than it would be if rates were at historically normal levels.

Furthermore, the case for further monetary stimulus is complicated as one track of the economy is doing reasonably well while others are slowing. Nevertheless Poloz said that there is still room to adjust monetary policy if needed.

Bank of Canada renews 2% inflation agreement; CPI measure changed Separately, the Government of Canada and the Bank of Canada agreed to renew the inflation target such that the inflation target will continue to be the 2% mid-point of the 1 to 3% inflation range. However they have decided to replace the current measure

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FX Flash - Weak CAD not for long - 25 October 2016

of core inflation with three new measures to address shortcomings of any single indicator. CPI-common, which tracks common price changes across categories in the CPI basket; CPI-trim, a measure of inflation excluding upside and downside outliers and CPI-median, the median inflation rate across CPI components will be used. The agreement will run for another 5 year period, ending 31 December 2021.

Canadian dollar to recover as crude oil prices firm; rate cut speculation fades We expect the Canadian dollar to recover to around 1.27 against the US dollar in 2017 given our view that crude oil prices is likely to firm (around USD 65 to USD 70 per barrel) next year. Sentiment in the CAD should also improve as financial markets price out (currently 30% chance) a rate cut next year. We favour fading the current positive momentum in USD/CAD towards 1.36.

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FX Flash - Weak CAD not for long - 25 October 2016