market updates market news Monthly Market Outlook
July 2014
The Loonie’s rally from mid-March has taken a bit of a breather in the month of July, with a few emerging developments that have caused the bulls to take pause before deciding on whether there is more fuel in the tank for another push higher. The catalyst for the bounce in USDCAD off the lows for the year was another soft employment report which showed a destruction of over 9k jobs during the month of June, completing the sporadic pattern of one month of job gains followed by another of losses, solidifying there is still much slack to be absorbed in the Canadian labour market.
As a result, the Bank of Canada monetary policy meeting on July 16th turned out to be slightly more balanced than some had expected given the recent rise in inflation, with Governor Poloz playing down the temporary increase in consumer prices as transitory, while downgrading GDP growth due to serial disappointment with the global economic landscape. Because the Bank of Canada has seen headline inflation rise above their 2% goal over the recent months, the downside risks to persistently low inflation have become less of an issue for the bank, though the recent spike in inflation is expected to moderate as temporary factors like higher energy prices abate.
“The Loonie’s rally from midMarch has taken a bit of a breather in the month of July...” As such, the Bank of Canada is firmly on the neutral spectrum when it comes to the future path of monetary policy, with data dependency becoming the focal point for the central bank. The last month has seen domestic data print to the soft side of expectations, with employment, PMI, and trade balance numbers all coming in lower than forecasted.
July 2014
That being said, both manufacturing and wholesale sales recorded strong gains in their May data, which could be a catalyst for better performance in retail sales and export growth. The challenge for the Canadian economy moving forward will be whether the momentum in export growth can be sustained, as prior to the four month rally in the Loonie, export-intensive businesses had not yet seen a persistent increase in demand due to the weakness in the Loonie, begging the question of how strong export growth will be after the recent 4.5% appreciation in the value of the domestic currency.
From an external perspective, the clipping of the Loonie’s wings from its recent glide trajectory has also been aided by the Federal Reserve and Janet Yellen, who somewhat surprised markets with her recent testimony to Congress where she warned interest rates could move higher sooner than participants currently anticipate. While the Fed’s taper is firmly in autopilot and set to be completed by October, the timing of the first rate hike is what markets are intently focused on, with a small faction within the Fed beginning to grumble early 2015 might be appropriate. If inflation and employment indicators south of the 49th parallel quicken their pace of improvement, an interest rate hike sooner than the latter half of 2015 would generate strong demand for the USD to the detriment of the Loonie. Though Yellen and the majority of the FOMC appear to be fine overshooting their inflation target for a period of time to promote a pro-growth stance,
a shock like what was witnessed at her Congressional hearing could throw markets into a tailspin.
“The challenge for the Canadian economy moving forward will be whether the momentum in export growth can be sustained...” Therefore, with the BoC in a neutral stance towards monetary policy the Loonie appears to be close to fairly valued from a domestic perspective, the risk is a shock from the Fed and a tightening of monetary policy sooner than anticipated, which would boost the buck and help USDCAD recover from its lows witnessed at the end of June.