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Comincio pubblicando uno studio di HSBC
The US and Canadian dollars' relationship has still not managed to generate any follow-through gains after its massive 25-cent-plus rally last November. This time last year, USD-CAD was in the midst of a nine-month sideways pattern that ended in August and was eventually followed by a sizable rally.
This is not to suggest that the current consolidation pattern is seasonal, but rather that consolidation patterns can, and often do, follow long-trending and/or sizable price movements. The November 2007-August 2008 sideways pattern followed the remarkable, near-70 cent decline of 2003-2007, while the current consolidation phase followed the big November 2008 rally.
The fact that USD-CAD has not yet extended that sharp November rally has not changed the view that the CAD will not fall against the USD. If anything, the fundamental backdrop for the CAD has turned worse, not better, since the turn of the new year.
Employment dropped a whopping 129,000 in January, including 114,000 full-time posts - three times the expected decline. Alongside the outsized job contraction, the unemployment rate surged to 7.2 per cent, also much worse than expected and a four-year high for the series.
For a consumption-driven economy such as Canada's (consumption comprises about 55 per cent of GDP), the effects of the significant contraction of employment, on top of the negative wealth effects of lower home and equity prices, imply notably weaker growth going forward.
These are critically bearish developments for Canada and are consistent with the Bank of Canada's (BoC) January interest rate cut (50 basis points to one per cent) as well as yet another downgrade in the central bank's economic forecasts. In the statement that accompanied the January 20 rate cut, the BoC formally stated that Canada's economy is in recession and the bank also revised down its 2009 GDP forecasts to -1.2 per cent from 0.6 per cent previously. While those assessments were not all that surprising, they highlight the probability for further monetary policy easing going forward. The next scheduled policy announ-cement is on March 3.
With policy rates already approaching zero, there has been some speculation that Canada, like the US, UK and others, could embark on a series of unconventional policy measures. However, while officials are not excluding anything, they apparently do not yet see the need or use of advancing such tactics.
Canada has so far avoided several of the more severe conditions that have prompted extraordinary actions in some other countries. Specifically, Canada's financial sector is in much better shape than the US' and the UK's, and a number of the measures taken in the latter countries have been designed and implemented specifically to deal with stresses in the financial system.
The Canadian authorities have less need for such extensive measures. But a more traditional monetary mechanism has, and should, continue to act as a shock absorber to Canada's economic woes, and that is the Canadian dollar itself. In a small open economy such as Canada's, a flexible exchange rate is expected to respond (i.e. weaken) to the combined effects of lower slower growth, lower interest rates and diminished demand for the country's exports.
The BoC once again highlighted the role that the currency will play in helping to counter economic stresses, saying: "As policy actions begin to take hold in Canada and globally, and with the support from past depreciation of the Canadian dollar, real GDP is expected to rebound, growing by 3.8 per cent in 2010." While the fairly strong growth forecast for 2010 raised a few eyebrows in the market, the emphasis here is on the role that a weaker CAD is expected to play in helping to restore growth. That too is consistent with expectations of further depreciation in the currency as the year progresses.
Like other countries, Canada is also employing expanded fiscal measures to counter the economic downturn. The government has proposed a fiscal stimulus totalling C$40 billion, larger than the two per cent target referenced by the IMF, but set to be distributed over the next two years rather than front-loaded. We note that Canada has the best fiscal pos-ition among the G7 countries, running annual surpluses and carrying a debt-to-GDP ratio near 30 per cent. That is con-sidered positive for the currency.
Developments on the US fiscal stimulus plan, as well as the financial market stabilisation plans currently in the works, could clearly have implications for USD-CAD as well. Since the turn of the year, markets have experienced rising and falling optimism on the Obama administration's ability to deal effectively with the crisis.
Comincio pubblicando uno studio di HSBC
The US and Canadian dollars' relationship has still not managed to generate any follow-through gains after its massive 25-cent-plus rally last November. This time last year, USD-CAD was in the midst of a nine-month sideways pattern that ended in August and was eventually followed by a sizable rally.
This is not to suggest that the current consolidation pattern is seasonal, but rather that consolidation patterns can, and often do, follow long-trending and/or sizable price movements. The November 2007-August 2008 sideways pattern followed the remarkable, near-70 cent decline of 2003-2007, while the current consolidation phase followed the big November 2008 rally.
The fact that USD-CAD has not yet extended that sharp November rally has not changed the view that the CAD will not fall against the USD. If anything, the fundamental backdrop for the CAD has turned worse, not better, since the turn of the new year.
Employment dropped a whopping 129,000 in January, including 114,000 full-time posts - three times the expected decline. Alongside the outsized job contraction, the unemployment rate surged to 7.2 per cent, also much worse than expected and a four-year high for the series.
For a consumption-driven economy such as Canada's (consumption comprises about 55 per cent of GDP), the effects of the significant contraction of employment, on top of the negative wealth effects of lower home and equity prices, imply notably weaker growth going forward.
These are critically bearish developments for Canada and are consistent with the Bank of Canada's (BoC) January interest rate cut (50 basis points to one per cent) as well as yet another downgrade in the central bank's economic forecasts. In the statement that accompanied the January 20 rate cut, the BoC formally stated that Canada's economy is in recession and the bank also revised down its 2009 GDP forecasts to -1.2 per cent from 0.6 per cent previously. While those assessments were not all that surprising, they highlight the probability for further monetary policy easing going forward. The next scheduled policy announ-cement is on March 3.
With policy rates already approaching zero, there has been some speculation that Canada, like the US, UK and others, could embark on a series of unconventional policy measures. However, while officials are not excluding anything, they apparently do not yet see the need or use of advancing such tactics.
Canada has so far avoided several of the more severe conditions that have prompted extraordinary actions in some other countries. Specifically, Canada's financial sector is in much better shape than the US' and the UK's, and a number of the measures taken in the latter countries have been designed and implemented specifically to deal with stresses in the financial system.
The Canadian authorities have less need for such extensive measures. But a more traditional monetary mechanism has, and should, continue to act as a shock absorber to Canada's economic woes, and that is the Canadian dollar itself. In a small open economy such as Canada's, a flexible exchange rate is expected to respond (i.e. weaken) to the combined effects of lower slower growth, lower interest rates and diminished demand for the country's exports.
The BoC once again highlighted the role that the currency will play in helping to counter economic stresses, saying: "As policy actions begin to take hold in Canada and globally, and with the support from past depreciation of the Canadian dollar, real GDP is expected to rebound, growing by 3.8 per cent in 2010." While the fairly strong growth forecast for 2010 raised a few eyebrows in the market, the emphasis here is on the role that a weaker CAD is expected to play in helping to restore growth. That too is consistent with expectations of further depreciation in the currency as the year progresses.
Like other countries, Canada is also employing expanded fiscal measures to counter the economic downturn. The government has proposed a fiscal stimulus totalling C$40 billion, larger than the two per cent target referenced by the IMF, but set to be distributed over the next two years rather than front-loaded. We note that Canada has the best fiscal pos-ition among the G7 countries, running annual surpluses and carrying a debt-to-GDP ratio near 30 per cent. That is con-sidered positive for the currency.
Developments on the US fiscal stimulus plan, as well as the financial market stabilisation plans currently in the works, could clearly have implications for USD-CAD as well. Since the turn of the year, markets have experienced rising and falling optimism on the Obama administration's ability to deal effectively with the crisis.
