USDCAD to Move Over 1.33 as We Approach Next Year
David Tulk, Chief Canada Macro Strategist at Toronto Dominion Bank, on Canadian economy
On May 6, the Bank of Montreal lowered Canada's growth forecasts for the Q2 from 1.5% to zero, due to the Fort McMurray wildfires. Nevertheless, analysts forecast that the economy should rebound in the Q3, posting a 3.0% growth. Are you of the same opinion or not? Why?
To my mind, that is a fairly reasonable assumption. The Fort McMurray wildfires are inherently a transitory shock that will impact the economy. The assets themselves are not at risk at this point; however, we see a quarter of weakness, estimating annu-alized growth in the Q2 to come out somewhere between a flat print and a decline of 0.5%. Later on, once activity is normalized and rebuilding efforts commence, we would expect a bounce, with the GDP growth approaching 3% in the Q3, which I find to be a reasonable expectation at the moment.
Lately, Canada's ratio of Chinese property buyers has significantly increased. In your opinion, what is the main reason for the following increase? What are the positive and negative effects of the money flow from China into Canadian real estate on the country's economy?
I assume the primary motivation at this point is what we have seen from the weakness of the Canadian Dollar over the last year or so. Ultimately, that has made Canadian real estate cheaper for international investors and contributed to an increase of flows into some of the larger cities in Canada, namely, Vancouver and Toronto to a certain extent. I think, this does have chal-lenges as well as opportunities. It certainly does make some of these larger cities a little bit more vulnerable to a correction, if those inflows were to stop or if you were to see an increase in interest rates that would hurt affordability for domestic purchas-ers. From a benefit stem point, it does increase the value of homes across these regions, which helps existing owners benefit. Eventually, that would be able to be turned around and support stronger spending on consumer products.
What will be the major drivers for the Loonie this year and what are your forecasts for EUR/CAD and USD/CAD for the same period?
At the current moment, what we are looking at is more to do with movements in the US Dollar. I think the Greenback will strengthen, as we start to move into the next year. Our prospective at least on the US Dollar by the middle of 2017 is to see a slightly weaker Canadian Dollar, up to 1.33 for the USD/CAD currency pair. The Euro will probably also strengthen relative to the Canadian Dollar, so we can end up to 1.49 by the middle of next year.