© Marc Chandler
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I do not quite see it that way, I think Canada is experiencing the tough times. However, to my mind what helped Canada was of course a positive terms of trade shock: we had price of commodities rising faster than price of manufactured goods leading to troublesome excesses in Canada. In fact, most recently the Bank of Canada has pushed further out in time when it would be removing accommodation. Previously the Bank of Canada thought they would raise rates this year, and now the central bank's officials postpone this decision to the next year. Hence, there is a concern that the economy is softening. Second thing I would say that the terms of trade shock is going to be negative. Finally, since Canada pursued lower interest rates for a long period of time, there are some financial excesses developing the system such as per capita debt in Canada, which is higher than it was in the U.S. or the U.K. at its peak. There is a housing market problem as well that is near to begin popping but it has got some time to unravel. This in turn is going to affect employment because housing captures the large part of the Canadian`s employment sector. I am concerned that the best news of Canada is behind us and the bigger question is how the Canadian economy is softening and how all these excesses are changing the trust of monetary policy.
Do you expect any changes in the monetary policy once Mark Carney leaves his job as Bank of Canada Governor?
Mark Carney took over, when the crisis had already begun. To my mind, the Bank of Canada Governor was able to avoid a lot of problems like sub-prime crisis in the U.S., weak banking system due to the framework of the central bank he inherited. Hence, I do not believe that it particularly matters on the personality that much. Unlike the BOE, where the officials are talking about changing the mandate, the charter of the central bank; the Bank of Canada policy makers do not consider this as an option. Thus, I believe Canada's monetary policy is well defined and well anchored.
What is your forecast for USD/CAD for the end of March and for the end of the year and what will be key events for the Canadian Dollar in the near future?
I think that the Canadian Dollar has been declining for most of Q1. The U.S. Dollar has climbed to about 1.0350. USD/CAD is now slightly correcting and I think that in the near term it might go back to 1.01, and perhaps even move a bit higher toward 1.0150. However, we expect the Canadian Dollar to finish the year near par. Thus, we are looking at further weakness in the Canadian Dollar. Our short term forecast for the loonie is 1.01-1.0150, while in the medium term we are looking at 1.05 on the back of relative strength of the U.S economy and weaker commodity prices. In addition to that we think the market psychology has changed from buying dips in the Canadian Dollar to selling rallies. As we are approaching the end of 2013, we are probably looking at the Federal Reserve changing governors as well. This uncertainty at the end of the year could give the loonie a little bit of lift against the U.S. Dollar.