CAD: Room for Optimism? - Rabobank
Jane Foley, Research Analyst at Rabobank, suggests that the CAD has this
week rallied to its best level vs. the USD since July 2015 and the
recent gains in the oil price have been a big incentive for the CAD.
Key Quotes
“Incorporated
within the firmer tone of oil is a spark of optimism with respect to
the outlook for the Chinese economy. Also supporting the CAD has been a
string of better than expected domestic economic data. While the firmer
tone of the Canadian economy can be expected to be recognised by the BoC
in today’s publication of the Monetary Policy Report, it is equally
likely that Governor Poloz will highlight the ongoing risks to growth.
Canada’s
March labour market report brought news of a four times greater than
expected 40.6K rise which the majority of these jobs being full time.
This report sits comfortably with the recent better tone of consumer
confidence (which was boosted in the wake of the March budget) and with
the stronger than expected Q1 GDP report, which at 0.6% q/q was twice
the size of the consensus forecast. The combined impact of these strong
data releases has been to pare back remaining speculation that the BoC
could be poised to cut rates again. However, the BoC is likely to remain
wary about potential headwinds.
At its March policy meeting the
BoC warned that “financial vulnerabilities continue to edge higher, in
part due to regional shifts in activity associated with the structural
adjustment underway in Canada’s economy”. Similar concerns were referred
to by the IMF yesterday when it stated that “commodity-exporting
advanced economies continue to adjust to reduced income and
resource-related investment. While the IMF cut its forecast for Canadian
growth to 1.5% in 2016 from 1.7% in its January report, it was not all
bad news. The IMF also stated that for Canada “the drag from the energy
sector was offset partially by a more competitive currency and an
expected increase in public investment”. It is these factors that have
thrown a life-line to various parts of the Canadian economy.
According
to a recent report from the Conference Board of Canada, the production
of production of passenger cars and light trucks is up nearly 50% since
2011. That said, while strong auto sales in the US have been supportive,
Canada’s auto plants remains vulnerable to cheaper wages in Mexico and
the CAD/MXN exchange rate which has returned to levels last seen in
2012. Pharmaceuticals, aerospace, food processing and furniture making
are other Canadian production sectors which are reported to be doing
well in part due to the softer tone of the CAD vs. the USD.
While
the US is, by a huge margin, the largest trading partner of Canada,
China is now the second most important. According to a speech in early
April by BoC Senior Deputy Governor Wilkins “Canada face opportunities
and risks as China undergoes a complex transition to a more sustainable
pace of economic growth”. Given that China is the world’s largest
consumer of commodities, the price of oil will continue to provide a
tangible reference to the impact of Chinese growth on Canada.
Despite
this year’s recovery in the oil prices, huge inventories combined with
risk of further bad news regarding the Chinese economy later this year
suggest that upside momentum could run out of steam. This factor
combined with the risk that the BoC will retain a cautious outlook on
policy suggest that there is still risk that USD/CAD will pop back above
the 1.30 level later this year.”
News provided by: 
