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CAD: Fortunately weak - Rabobank

Discussion in 'Fundamental Analysis' started by FXStreet_Team, Jan 13, 2016.

  1. FXStreet_Team

    FXStreet_Team Well-Known Member Trader

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    FXStreet (Delhi) – Jane Foley, Research Analyst at Rabobank, notes that the Bank of Canada Governor Poloz has described the fall in global commodity prices as a “seismic shift” which will create a long and painful movement in Canada’s terms and trade that could last for “three or five years”.

    Key Quotes

    “Poloz also described the economy has being ‘fortunate” to have a flexible exchange rate to help it adjust. Measured since the start of last year, the CAD has fallen more vs. the CNY than any other G10 currency. Movements in the value of the CAD which are heavily correlated with the oil price can be viewed as the silver lining of the rout in energy prices since, from the point of view of the non-oil sector of the economy, this should be adding support.

    As a consequence of its potential impact on the external sector, the monetary easing implied by the weakness of the CAD can be viewed as a boon to the BoC. Unless inflation becomes a threat any central bank is likely to welcome a weakened currency due to the support it can offer exporters.

    Also, in an environment in which low interest rates has bred heightened levels of household debt in several countries including Canada, currency weakness has become a preferred avenue of monetary stimulus. Comments from Poloz that the BoC will “continue to run an independent monetary policy, anchored by our inflation target of 2%” are a reminder to the market that the BoC is under no pressure to follow the Fed’s policy tightening policy in the absence of inflationary pressure.

    Partly in reflection of the weakness of the CAD, the BoC is fairly optimistic about growth prospects this year, expecting it to accelerate to above potential. If Canadian economic data does strengthen there is likely to be some covering of CAD short positions. This may lead to some improvement in the level of the CAD this year. We expect AUD/CAD to drop towards 0.90 on a 12 mth view.”
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