Week in FX Americas – Canadian Dollar A Thanksgiving Target

Everyone and their mother must have heard Goldman’s recommendation for the loonie earlier this week – “Sell Mortimer, Sell.” It’s certainly not new news to the forex market; however, their target is a tad steeper than most – 88c or $1.12CAD within a year.

The Goldman team have highlighted that “since the global financial crisis, significant external imbalances have built up in the Canadian economy.” In 2008, the current account balance fell from a surplus of +1% of GDP to a deficit of -3% – and it has remained stable at this level ever since. The main culprit has been a decline in manufacturing exports, which has fallen by about -30% in five-years.

Goldman notes that capital flowing into the economy of the US’s largest trading partner has slowed markedly, and interest rates are low, and are expected to stay there. This is in contrast to the IMF’s way of thinking that sees the CAD benchmark-lending rate doubling by the end of 2015. Interest rate differential plays a big part; the BoC would never allow Canadian rates to move too far away from the US overnight.

Many continue to see the loonie as being overvalued, but nothing like Governor Stevens Aussie dollar. Combined with the weak current account position, there are good fundamental reasons for a weaker CAD. The commodity sensitive economy needs to see an improvement in Canada’s resource product prices and a measured pick-up on global growth in order to see the current account deficit actually narrow.

Foreign direct investment has slowed for the second consecutive quarter while that by Canadians rose. The current account deficit shows that Canada remains dependent on capital inflows. Analysts note that a high percentage of those inflows are coming in the form of “easily-reversible portfolio investments” – which leaves the loonie vulnerable especially if investor confidence turns sour on Canada. Obviously a stronger US economy and softer CAD would help narrow the gap.

The loonie ends the week trading at a two-year low north of $1.06 erasing earlier gains after a better than expected Q3 GDP report (+2.7%). Low liquidity exasperated the CAD slide in this holiday shortened trading week. Market momentum continues to favor the US dollar – dollar-buying orders are beginning to stack up below ahead of 1.0550 level. Dollar sellers are raising their orders.

WEEK AHEAD

USD ISM Manufacturing
AUD Reserve Bank of Australia Rate Decision
AUD Gross Domestic Product
EUR Euro-Zone GDP
CAD Bank of Canada Rate Decision
USD U.S. Federal Reserve Releases Beige Book
GBP Bank of England Rate Decision
EUR European Central Bank Rate Decision
USD GDP
EUR ECB President Draghi holds press conference
USD Change in Non-farm Payrolls
CAD Unemployment Rate
USD U. of Michigan Confidence

This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.

Dean Popplewell

Dean Popplewell

Vice-President of Market Analysis at MarketPulse
Dean Popplewell has nearly two decades of experience trading currencies and fixed income instruments. He has a deep understanding of market fundamentals and the impact of global events on capital markets. He is respected among professional traders for his skilled analysis and career history as global head of trading for firms such as Scotia Capital and BMO Nesbitt Burns. Since joining OANDA in 2006, Dean has played an instrumental role in driving awareness of the forex market as an emerging asset class for retail investors, as well as providing expert counsel to a number of internal teams on how to best serve clients and industry stakeholders.
Dean Popplewell