© Jack Spitz
|
I believe there is a possibility of QE implementation, but before that we would need to see the benchmark rate at or near zero before the Bank of Canada contemplates additional non-conventional easing measures. We are not there yet and current monetary policy is already extremely accommodative at least as measured by inflation metrics. QE in Canada, if it happens would be an historical first for the country; Canada has never implemented quantitative easing measures.
We have had a benchmark policy cut here and the market is biased for another cut, but there are no quantitative easing measures. There is only rate cut implemented in Canada at this point time. From that perspective we can say that monetary policy is absolutely accommodative. There is the possibility that the Bank of Canada will deliver another rate cut, since the market is biased for it in Canada potentially between now and the end of the year. However, much of those pathways depend upon Canada's economy and as a catalyst of that, oil is expected to remain soft. Some of the transitory effects of weak oil are lasting longer than the Bank of Canada anticipated. They could play towards pushing interest rates lower in this country, but we believe it will not happen yet.
The Canadian Dollar softened against a rebounding US currency last week, as economic data helped to drive the Greenback higher, and China soothed concern that its devaluation of the Yuan might spur a currency war. Based on that, how do you evaluate the current performance of the Canadian Dollar? What productivity do you expect from the currency versus its major counterparts in Q3 of 2015?
The Canadian Dollar is driven predominantly by fundamentals, both internal and external. The energy sector is an important internal influence and the price of many commodities (including oil) is very much influenced by external factors including a potential economic slowdown in China. I cannot say whether another round of devaluation from the People's Bank of China is in the cards but the recent CNY price action did manage to spur dialogue as to whether or not this is the start of competitive devaluation in the currency space. The inference has already caused Asian EM currencies and other high beta currencies such as the Australian Dollar and the Canadian Dollar to weaken.
What are your forecasts for USD/CAD and EUR/CAD for the Q3 of 2015?
NBF Economics and Strategy Group publish timely FX forecasts on behalf of the Bank. They are currently forecasting the USD/CAD being at 1.31 levels. With respect to the Euro we expect to see further weakness in the common currency against the US Dollar. However, combined with weakness in the Canadian Dollar we believe the EUR/CAD touches 1.40 levels by the end of Q3.