The Canadian dollar has been range bound and had to react to world economic, political and social events outside its borders and with very little control of the outcome. Canadian fundamentals are strong although there are some manufacturing and housing question marks that could slow growth in 2013. In 2012 Canadian equities under performed their international peers and there is an expected recovery in Energy and resource based companies in the new year. The USD/CAD Started the year at 1.02 and finished the year at 0.9933 a 2.8 percent appreciation for the loonie in 2012. The CAD started the year on a positive note and reached a 7 month high in April.
The European crisis hit in May and erased all the gains that the CAD had accumulated versus the USD up to that point. Investors sold the loonie versus the dollar looking for a safe haven, depreciating the Canadian dollar above parity. It was not until the beginning of June that the CAD was able to appreciate versus the US dollar, aided in fact by the decision by the Fed to extend the Quantitative easing program and keep interest rates low for the foreseeable future. Over the summer the uncertainty surrounding the potential Greek debt default made investors turn to the US dollar. The USD/CAD reached close to 1.0350 in June which turned out to be the yearly high for the US dollar. The loonie started to appreciate until reaching 0.9740 in early September. That move ended a 6.2 percent appreciation for the Canadian currency.
The loonie has depreciated slightly in December due to a thiner market and overall uncertainty about the fiscal cliff in the US, developing events surrounding the European debt crisis and the expectations of the new Japanese government.
2012 was a mixed bag for the Canadian economy. Housing is starting to show sings of a slowdown and although it hasn’t come to a screeching halt the Bank of Canada and the Finance Minister both have made it clear they would prefer a slowly cooling market than a sudden crash.
2012 Biggest Items
Energy and Commodity Prices
Enegy prices were not as volatile this year. Some analysts credit the work of the White House to isolate the difficult Iran sanctions with the diplomatic work in parallel needed to avoid oil supplies shortages with producing countries. Metal stocks have under performed the metals pairs but if the recovery trend continues into 2013 they should catch up and benefit the overall Canadian economy.
Unemployment steady above 7 percent. Manufacturing continues its long-term shrinking trend but it has been offset by gains in food service, retail and agricultural sectors. Construction continues to slow down which could signal a direct shrinking of the housing bubble.
Bank of Canada
GDP growth was disappointing in 2012 but strong fundamentals specially when compared to other G7 countries. Globally growth forecasts have been revised downward and Canada was no exception. Manufacturing, construction and transportation registered declines in the third quarter.
Growth in the fourth quarter is probably going to come in at around 1% and with subdued inflation there is no pressure on the Bank of Canada to hike interest rates.
Mark Carney to the BoE.
One of the biggest stories in Central Banking this year if not a decade. The Bank of England chose Sir Mervyn King’s replacement and the elected candidate was the current Bank of Canada President Mark Carney. His leadership will be missed. He will not encounter such an orderly and compliant system in England which could prove to be the hardest job of his career. His replacement in the Bank of Canada will receive a steady ship that could be facing some troubled waters up ahead.
Expectations for 2013
US fiscal cliff and debt ceiling debates
The deadline is hours away starting in January 1st the tax increases will hit American households. Not discounting a last minute agreement which could still happen. Republicans and Democrats have not been able to find a middle ground in a variety of topics. The most debated is the income and the tax rate that should be applied to its highest earners. Democrats argue for a 45% tax rate for people earning over $350,000 while Republicans are pushing for a 35% rate for people making over $450,000. If a deal is not reached it will have huge political and economic implications for the next highly controversial item up for debate, the debt ceiling. Lack of political consensus has hurt the US dollar as the disagreements could push the US into a recession once again.
OPEC sanctions have seen Iran drop in the oil producers lists. Since a major disruption to the world’s oil supplies was averted the price has increased slightly. The expected economic recovery in major markets could boost the demand for energy in 2013.
Canadian housing is expected to slow down as lack of demand continues to trickle down into other sectors. The government would rather have a slow transition and avoid a shock correction if possible.
European debt crisis
Spanish Prime Minister Mariano Rajoy during his end of year address has made clear that Spain does not need an European bailout… yet. The ECB through Mario Draghi’s statements of unlimited funds available (but they have to be requested) have given Rajoy some breathing space. It has been used with some comic moments like when the Finance Minister argued that Spain might not need it at all which was met with laughter at the London School of Economics where the minister was giving a talk. European leaders had a great year in 2012 by using their statements to support the Euro and build confidence in investors that they are ready to act when needed. Some are even making “Worst is behind us” type of comments, just as other like Chancellor Merkel have issued warnings on what could still happen in 2013. There is still the fear that the Greek crisis and its effect will be felt in Spain, Italy and ultimately France if actions rather than words do not tackle the potential domino effect.
Japan Government and Central Bank
The Japanese elections confirmed the predictions made by the majority. Shinzo Abe led a return to power for the LDP. He has also started to comment on one of his campaign promises and has put some pressure on the Bank of Japan to double the inflation target to 2% from the current 1%. The current economic environment and his very public statements have had the desire effect and the yen has weakened significantly. Next year it will be clear if this strategy works out for the newly elected Japanese leadership to weaken the yen longterm and benefit exporters to boost economic growth.
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