© Shaun Osborne
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In my opinion, the latest data from Canada suggest that there probably is less economic momentum than the consensus had reckoned at present time. Moreover, beyond the GDP estimate, last week's trade numbers were quite illustrative of that point. The recovery that we have seen in the trade sector early in the beginning of 2014 seems to disappear at least to some extent. Nevertheless, economists are still looking for growth in the region of 3%-4% for Q3. However, after the trade numbers are out, it seems much more likely that we can witness this figure to be slightly in line with the BoC current expectations for the economy, which is around about 2.3%.
I believe the general message from the Bank of Canada has been extremely dovish recently, given the stronger indicators that we had, prior the most recent data from Canada. Therefore, I think it supports their view that rates are unlikely to move up anytime soon. The TD anticipates that rates will rise towards the middle of 2015 for around about the same time as we expect the Fed to implement this measure.
However, my personal view is that the BoC would rather stay on hold for as long as it possibly can. The general message from the Bank of Canada at the moment is they should not anticipate the rates to move up, just because the Fed is starting to tighten. That way they will remind investors that rates in Canada have already moved up at some degree. Hence, I think the BoC is really trying to portray a situation, giving the Canadian economy the maximum leverage to low interest rates, and probably indirectly keep some downward pressure on the Canadian Dollar.
A lot of experts blame Canada for its lack of growth to aid the country's recovery from the 2008 recession. The sluggish consumer sector reflects, at least in part; households accumulated record levels of debt in the low-interest-rate environment of the early recovery years. To your mind, in what direction is the economy heading at this point? What is the most important headwind for the economy?
The fact that we had strong growth in Canada is largely due to consumer action. If we pay attention to the breakdown of GDP growth, we can see that it is largely domestic spending and mainly the consumer in Canada that are doing the heavy-lifting for the economy. However, it is not a sustainable situation, due to the leverage mentioned.
I believe the BoC wants to see a long-awaited rotation away from domestic demand to more balanced growth in the country, which is supported by trade and investment, and which is lagging at the moment. To my mind there was some hope through the first half of 2014 that trade sector is starting to become a bit more momentum. This impetus would be able to close the gap, on which governor Poloz was referring to on the rebound that we were seeing at the global trade. I think that the recent data undercut the argument to some degree.
We are clearly not getting enough rotation to odd investment that the bank is really seeking at the moment. It is unlikely that consumers will continue to be able spending the way that they have. The interest rates are likely to move up in the next few years and that is going to pinch somewhat on the consumer sector. At the same time there is no rotation to more sustainable growth drivers and investment that the bank thinks is vital to get the economy back to its full capacity. Hence, that also supports an idea that the interest rates will stay lower for a little bit longer than most people expect in Canada at the moment.
What events will determine the Canadian Dollar until the end of 2014?
The main focus for Canada right now will be both the US economic data, focus on the Fed move away from QE and the potential for interest rates to diverge a little bit more between Canada and the US, as interest rates will converge, as rates in the US continue to rise and Canadian rates remain more stable. Hence, we have seen some narrowing in the interest rate differentials between Canada and the US over the last few months, and I think that has been strongly supportive of a high greenback. So, continuation of that trend is going to be important.
What are your forecasts for the USD/CAD, AUD/CAD and the CAD/JPY currency pairs by the end of Q4?
Talking about the USD/CAD pair, we anticipate it to trade at 1.12 by the end of Q4. Looking in to the upcoming year, we remain quite constructive on the outlook for this particular pair overall, whereas TD believes that 1.15 is reachable early in 2015. It might be possible to see some consolidation after that, however, to my mind, there is a risk of a stronger greenback over more sustainable period then we are currently forecasting, with the pair possibly heading to 1.18. As for the AUD/CAD our target is 90, and finally for the CAD/JPY we anticipate the pair to reach 96 levels.