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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