market updates market news Monthly Market Outlook
September 2014
The month of August was a choppy one for the Loonie, with the commodity-linked currency unable to regain any lost ground from the weakening trend that began at the start of July. The macro-economic backdrop between Canada and the US is developing in-line with what we had expected for the majority of 2014, with positive economic gains south of the 49th parallel driving economic activity within Canada, albeit with a time-lag of a few months. Recently, we have begun to see stabilization in the overall economic picture for the American economy, with business investment picking up, which has translated into stronger gains in the labour market. As such, chatter the Fed may have to look at tightening monetary policy sooner than originally anticipated is arising, and though the latest employment numbers out of the US have eased tightening expectations somewhat, the relative bounce-back in GDP growth for the American economy into the end of the year should have the Fed on pace start raising rates at the beginning of Q2 2015. Domestically, the Canadian economy has yet to receive any sustained momentum from a softer currency and a pick-up in demand from the United States. While the export market is beginning to show some signs of life, further gains coming from external demand will need to be made before the economy starts firing on all cylinders. The Bank of Canada has mimicked the neutral outlook on the Canadian economy, reiterating that while stronger external demand from our main trading partner down south is promising for Canadian growth prospects, the housing market remains a concern and there continues to be an issue with diversifying
the domestic economy away from one so heavily reliant on consumer consumption.
“...the Canadian economy has yet to receive any sustained momentum from a softer currency and a pick-up in demand from the United States.�
September 2014
From an international perspective, the tense geopolitical spectrum that has dominated headlines, and consequently broader risk appetite, seems to be quieting down. With a potential cease-fire agreement in Eastern Ukraine and the situation in Gaza calming for the time being, global market participants may be able to achieve a reprieve from worrisome headlines. Particularly, the easing of sanctions towards Russia should the ceasefire in Ukraine prove fruitful, will help global trade begin to flow more freely. Not only will a stronger Eurozone benefit Canada from an export perspective, but investors will also be more inclined to look for places to park money that can garner higher returns than risk-free investments, which will be a benefit to the Loonie and other high-yielding assets.
Heading into the end of the year, we foresee a modest weakening of the Loonie, especially when rhetoric of Fed tightening begins to ramp up as we continue to see the American economy hitting its stride. While we do see a higher USDCAD moving into the last quarter of 2014, early 2015 should start to see the Loonie regain some of its ground as the benefits of a stronger American economy start to flow through to Canada’s exports sector, with a weak Loonie helping drive external demand. A robust export sector will help take some heat of the reliance on Canada’s housing market, and allow Poloz and the Bank of Canada to follow on the heels of the Fed and start looking to raise rates in the second half of 2015.
“...early 2015 should start to see the Loonie regain some of its ground as the benefits of a stronger American economy start to flow through to Canada’s exports sector, with a weak Loonie helping drive external demand...”