Fx watch cad 13 july 2015

FX Watch More bearish on CAD

Group Economics Macro & Financial Markets Research Roy Teo +65 6597 8616

13 July 2015 We expect the Bank of Canada to turn dovish in the next monetary meeting on 15 July and signal that a rate cut is imminent.

Another 25bp insurance rate cut in September is likely. This is not fully priced in by financial markets. Hence we have raised our 2015 year-end target from 1.30 to 1.32.

More bearish on CAD

an uneven global recovery. Furthermore, the central bank’s

We have raised our 2015 and 2016 year-end USD/CAD

assumption that non-energy exports will recover due to a

forecast to 1.32 (from 1.30) and 1.37 (from 1.35) as economic

stronger US economy and weaker exchange rate has not

data has continued to disappoint. We now expect the Bank of

materialised. In our view, core inflation is expected to trend

Canada to lower the overnight lending rate by 25bp in

lower due to persistent slack in the economy and soft labour

September. This is not fully priced in by financial markets.

market. We expect the unemployment rate to head higher led

by Alberta region.

Bank of Canada to strike a dovish tone We expect the Bank of Canada (BoC) to strike a dovish tone on 15 July, acknowledging that economic data recently has disappointed. This would pave the way for another insurance

Core inflation to trend lower %

%

85

2.5

rate cut in September. In the last monetary policy statement in May, the central bank stated that an improvement in exports

2.0 80

and business investment is expected. The outlook on consumption is also projected to improve. However, both

1.5

exports and consumption have disappointed. A recent survey

75 1.0

by the central bank also showed that sales outlook and business investment sentiment remains weak. Crude oil prices (major export of Canada) have declined by almost 10% since then. Furthermore, economic growth in April expanded at the

70 0.5 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Capacity utilisation % (lhs)

slowest pace since December 2012.

Core CPI YoY% (rhs)

Source: Bloomberg

Weaker CAD: Non-energy exports have not recovered Index level

reverse scale CAD mln

Market positioning We judge that there is further room for the Canadian dollar to

125

24000

120

26000

115

28000

110

30000

positions are not at extreme levels. In addition, investors have

105

32000

not sharply increased positions to hedge weakness in the

100

34000

Canadian dollar despite recent disappointing economic data.

36000

Last but not least, technical chart indicators imply that the CAD

95 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 CAD TWI (lhs)

Non-energy exports CADm (rhs)

underperform as investor positioning in financial markets are currently not at extreme bearish levels. Though speculative net-positions in the futures markets remain short, these

is not oversold.

Our USD/CAD forecasts for 2015 and 2016

Source: Bloomberg

13 Jul USD/CAD

Weak exports and core inflation to trend lower Though the US economy accounts for about 70% of Canada’s exports, the trade balance has continued to deteriorate due to

1.27

Q3 2015

Q4 2015

Q1 2016

Q2 2016

1.32

1.34

1.30

1.32

Q3 2016

Q4 2016

1.35

1.37

Source: ABN AMRO Group Economics

2

FX Watch - More bearish on CAD - 13 July 2015

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