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In this particular case, it looks more like a short term issue. Canada's trade balance tends to fluctuate between a billion dollar deficit or surplus. It depends mainly on what happens with resource prices and commodity exports, because Canada is a major commodity exporting country. With the loonie having weakened from close to parity a few years ago down to 1.10 against the U.S. Dollar, clearly imports coming in to Canada are costing more and that is impacting the trade balance a little bit. As well between the slowing demand for resources from China and the weaker Canadian Dollar, we are not seeing the big multi-billion dollar surplus that Canada used to post; so the trade balance is basically hovering around parity these days.
Canada's unemployment rate rose from 5.9% in February 2008 to 8.7% at the height of the recession in August 2009. Last month it was at 6.9%. What is your overall outlook on Canada's labour market, and do you expect the unemployment rate to return to 5.9%? If so, when could that happen?
Canada's labour market has been rather stable for the last six months, and actually if you add up all of the monthly job increases and decreases since last fall, it has been pretty much flat. Therefore, we would also expect the unemployment rate to remain unchanged. The U.S. is showing a stronger surge at the moment, while Canada is holding steady. This is common during cycles, the U.S. tends to outperform at the beginning. Certainly Canada did well coming out of the last recession and the U.S. now caught up to us. They are moving ahead as they normally do at this point in the cycle. Canada, however, tends to outperform near the end of cycles mainly because of our dependence on commodity exporting and related businesses, those tend to be late- stage sectors. It is possible that Canada could return to 5.9% unemployment rate; although, as it happened at the end of the last cycle it would probably be closer to the end of the current cycle, thus maybe a few years out.
What could be the main drivers for the loonie?
I think the overall trend we are going to see in the loonie this year is one of recovery. Canada's currency had weakened dramatically over the last 18 months. Recently, we are seeing some significant signs of a turnaround for the loonie coming back from its previous weakness. The two main drivers for the Canadian Dollar are the interest rate relative to the other countries, as well as commodity prices. In terms of commodity pricing some of the weakness we have seen is starting to wane. Gold had fallen significantly over the last couple of years, and remains under pressure. Of course the Canadian Dollar is sensitive to trends in crude oil, which has started to turn around and work its way higher along with copper and other metals. The improvement in crude and copper are driven by increase in global demand, as there were better PMI numbers out of China as well as Japan, and also due to the ongoing improvement in U.S. The commodity price trend favours the loonie's recovery, the interest rates in Canada are likely to remain on hold for some time as there are still a number of central banks, particularly the United States, that have lower interest rates than Canada. Moreover, the nation's inflation is low; therefore, central bankers are not under pressure to raise rates, they are likely to be neutral.
What are your USD/CAD and EUR/CAD forecasts for the short term and longer term?
USD/CAD had a big run up between September and March, it is pretty much topped out now and has turned around and is starting to go back down again. The pair is consistently trading below 1.10 and currently trading in about 1.0850 – 1.0900 range. I expect it to stay in this kind of area in the short term, over the next two-three months; therefore, in the near term it could be around 1.09. However, this is a pause in more of an emerging downtrend and it does have the potential over the longer term to head closer to 1.0750 or possibly even 1.06 towards the end of the year. We have seen a classic text book head and shoulders top forming in EUR/CAD since the beginning of the year that is a big technical reversal pattern. It seems that the positive trend of EUR/CAD is starting to reverse and the loonie is finally starting to recover. Therefore, it is broken down below 1.50 and trading above 1.4750. In the near term I expect it might trade in this range around 1.48. As we go further into the year and if it does manage to go below the 1.4750, there is some definite room for improvement. Particularly if we do see more easing or stimulus come from the ECB in the coming weeks, we could see the Canadian Dollar depreciating closer to 1.45 or possibly even 1.4250 against the Euro towards the later part of the year.