© Greg T. Moore
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That is surely a contentious issue right now, the Dutch disease debate. Mark Carney, the governor of the Bank of Canada, about two-three weeks ago, made a speech specifically addressing that issue. He argued that while high oil prices do help lift the Canadian dollar, the impact is a net benefit to the Canadian economy, which is not consistent with so called Dutch disease. In my opinion, I think Carney addressed the crux of the issue, and the point that is the most difficult to show evidence of, which is whether the net impact is positive. To me though, I think the difference in regional economies means it should be a hotly debated issue for years to come regardless of the actual net implications on the economy as a whole.
How would you evaluate the current performance of the Canadian Dollar versus the USD? What are your forecasts for the currency pair?
Over the past few months quantitative easing in the U.S. combined with the fact that the Bank of Canada has maintained a hawkish stance has been the big themes that have helped the Canadian dollar slowly grind higher. In fact, the rise has been greater than we had forecast. We have notched up our forecast for the Canadian dollar to acknowledge this, but we continue to see at least a bit more weakness as we head into the end of the year. Our forecast for the end of the year is now for USD/CAD to reach 1.00, which should reflect the markets' greater focus on soft global fundamentals as opposed to just this endless quantitative easing from major central banks. Since the Canadian dollar is considered a risk currency, that should see it soften at least a bit from here.
In your opinion, what effect will a failure of the U.S. Congress to avoid the so-called "fiscal cliff" have on the Canadian economy?
That is one of the risks that we have been highlighting among several others, most of the other being in Europe and Asia. In the case that the U.S. Congress fails to come to some sort of an agreement, it will have a huge impact on U.S. growth. Canada, as an economy that is highly dependent on exports to the U.S., is strongly connected to the US economy, and would clearly be impacted negatively. Whether the Canadian economy would be hurt more than the U.S. economy is a topic for a debate, but in general, when the U.S. economy slows, the Canadian economy follows. Markets would also react quite negatively, and when financial markets are tumultuous the Canadian Dollar tends to underperform. To sum it up, if the U.S. Congress does not agree on some sort of measures to avoid the "fiscal cliff", the Canadian Dollar should weaken.
What will be the other drivers that will determine the CAD performance in the future?
The CAD has certain typical fundamental drivers, and I don't see those changing any time soon, but I think the trend that we have seen recently, where the Canadian dollar has mostly been driven by the risk appetite of the markets, is here to stay for some time still. The traditionally important fundamental drivers of the Canadian dollar are still important from a long term perspective, but the shorter term movements will probably still look to the big global macro themes at the moment. In the coming months we will still be watching some of these big macro issues, as they will not only be the concerns for the CAD, but will be the main drivers for the most major currencies. Quantitative easing, whether Europe can make progress on their fiscal crisis, whether they can decide on what is going to happen with Greece and how they can shift the perspectives on Spanish and Portuguese debt sustainability, as well as some of the U.S. issues, which are starting to creep forward, including the "fiscal cliff". In terms of the more traditional fundamentals, the difference between U.S. and Canadian short term rates, the Canadian terms of trade, and the long term inflation outlook relative to other regions should continue to be important factors underlying the CAD's longer term direction.