FX Watch
Group Economics Macro & Financial Markets Research
13 January 2016
BoC to turn dovish: CAD negative Roy Teo Senior FX Strategist Tel: +65 6597 8616 roy.teo@sg.abnamro.com
BoC to turn dovish as oil prices plunged …
… and recent economic data disappoint
Downside risks to inflation outlook
Slower recovery oil prices and monetary policy divergence – CAD negative
2016 year end USD/CAD forecast raised from 1.41 to 1.48
BoC to turn dovish as oil prices have been lower than forecast … We expect the Bank of Canada (BoC) to turn dovish in the next monetary policy meeting on 20 January. The BoC is likely to highlight that downside risks to their economic growth projections made in October 2015 have increased. This is because oil prices have been lower than the central bank’s forecast ((WTI and Western Canada Select crude oil forecast is USD 45 and USD 30 respectively). This will likely force firms in the energy sector to delay their investment spending plans. As a result, the economy may return to full potential later than the middle of 2017 projection made in October 2015. We think that a 25bp insurance rate cut later this year in April is likely. An earlier move this month cannot be ruled out. This is not fully priced in by financial markets. ... and recent economic data have disappointed Economic growth in the third quarter of 2015 has been weaker than the central bank’s projections made in October 2015. GDP in the last quarter of 2015 is also likely to disappoint. In addition, the recovery in non-energy exports has been slow while the decline in energy exports have continued. The unemployment rate has edged higher and is expected to deteriorate further. The soft labor market and elevated household debt are also expected to weigh on household expenditure. Downside risks to inflation outlook BoC governor Poloz has recently stated that as US monetary policy continues to normalize, firmer domestic yields (due to spillover effects) will pose further downside risks to the inflation outlook. Core inflation, which has declined to 2% in November 2015, is overstating the underlying inflation in the economy due to the impact of weaker CAD on prices of imported goods.
Insights.abnamro.nl/en
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FX Watch – CNY index implies weaker CNY?– 15 December 2015
Slower recovery in crude oil prices to weigh on the CAD We have also become more bearish on the Canadian dollar (CAD) as we now expect a slower recovery in crude oil prices to USD 40 and USD 55 per barrel in 2016 Q1 and 2016 Q4 respectively (compared to our previous forecast of USD 60 and USD 65). For more details, please refer to our Energy Monitor January – Revised oil price forecast published on 8 January 2016. Existing oil sands projects are unlikely to be profitable until the second half of this year as their breakeven crude oil prices are estimated to be around USD 50 per barrel. New projects’ breakeven costs are likely to be higher. Hence expectations of stronger business investments driving economic growth is unlikely to materialize this year. Monetary policy divergence to weigh on CAD More importantly, we expect interest rate differentials between the US and Canada to widen further this year and this is positive for USD/CAD. Our view that the Fed is likely to raise monetary policy by 75bp this year is not fully priced in by financial markets. In addition, there is a material risk that the BoC may need to cut rates by 25bp sooner than later to support the economy. 2016 year end USD/CAD forecast raised from 1.41 to 1.48 In conclusion, we have become more bearish on the CAD and expect it to depreciate more. Our year end USD/CAD forecast have been raised from 1.41 to 1.48. We no longer expect the BoC to tighten monetary policy in late 2016. Nevertheless, the extent of depreciation in the CAD is likely to be smaller than in 2015 as speculators’ net short positions in the CAD are getting overcrowded. Furthermore, technical indicators imply that the bearish sentiment in recent months are overdone and hence the pace of depreciation in the CAD is unlikely to persist. Our 2017 year end USD/CAD forecasts have also been raised from 1.25 to 1.30.
USD/CAD forecasts
USD/CAD
13-Jan Q1 2016 Q2 2016 Q3 2016 Q4 2016 Q4 2017 1.4248 1.44 1.46 1.47 1.48 1.30
Source: ABN AMRO Group Economics
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FX Watch – CNY index implies weaker CNY?– 15 December 2015
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