Alvin T. Tan, Research Analyst at Societe Generale, suggests that the Canadian dollar has been among the top performers year-to-date and the chief driver of that performance is the rally in crude oil prices coupled with the improvement in risk sentiment lately.Key Quotes
“USD/CAD peaked on the very same day as crude oil prices hit a bottom in January tells us much about what has been influencing the currency in recent months.
Although CanadianQ4 GDP growth was stronger than expected, the growth outlook remains weak overall. Business investment has been badly hit by the steep drop in energy prices. The unemployment rate has crept up to 7.3%, and inflation readings appear to have peaked, when the lack of disinflation was one of the highlights of the Canadian economy. On the other hand, low interest rates have helped to support consumer spending and the housing market.
More important though is the newly announced fiscal stimulus package by the new government in Ottawa. The stimulus is expected to boost this year's growth by 0.5 percentage points, and one full percentage point the following year. The Federal government’s budget balance would drop to –C$29.4 bln in FY 2016-17 from the current –C$5.4 bln. The fiscal stimulus is not particularly large relative to the size of the economy, however, as the fiscal deficit is only expected to widen to -1.5% of GDP in FY 2016-17 and -1.4% the following year. Furthermore, Canada has among the lowest debt-to-GDP ratios of developed economies.
The fact remains that we expect the Fed to hike rates once in H2 2016, while the Bank of Canada is widely expected to stand pat on rates. The BoC would also welcome the loonie staying weak as a pillar of support for the economy. As risk sentiment globally stabilises further, Fed rate expectations will likely climb too. All these suggest a moderately higher USD/CAD in line with our forecast of 1.37 by mid-year.
But so long as crude oil prices do not revisit the cyclical lows under $30/bbl, which is our baseline scenario, then USD/CAD should have seen the cyclical highs. On the other hand, USD/CAD has shown a positive correlation with global risk sentiment in the past few years, such as proxied by the VIX Index. Thus, there are upside risks to USD/CAD in an uncertain world bedevilled by the Chinese structural growth slowdown. Nonetheless, we are constructive on CAD over the course of the year, and expect it to continue to outperform other G10 commodity currencies such as AUD and NZD. Short NZD/CAD remains a key medium term call for us.”
Alvin T. Tan, Research Analyst at Societe Generale, suggests that the Canadian dollar has been among the top performers year-to-date and the chief driver of that performance is the rally in crude oil prices coupled with the improvement in risk sentiment lately.
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