Steven Knight, Research Analyst for Blackwell Global, looks at the trading potential of the Canadian Dollar and the geopolitical aspects that currently surround its presence as a major, and the sovereign currency of one of the world’s most economically stable nations
The negative trend in global energy prices has continued to be problematic for the Canadian economy.
Persistently weak energy prices have caused a significant dip in monthly GDP with May showing a contraction of -0.2% (0.2% exp). June also represented a month of contraction with GDP m/m returning a result of -0.2%. However, the Canadian economy is undergoing a period of re-organisation as the effect of low energy prices start to dissipate.
The Bank of Canada projects a persistent shift of investment and jobs away from the low yielding energy industry into other sectors of the economy. Subsequently, we forecast GDP to strengthen slightly throughout the later part of 2015 and for the economy to grow around 2% in real terms.
Persistent unemployment remained a significant constraint on domestic growth during the quarter with the unemployment rate remaining static at 6.8%.
The structural changes occurring within the economy, as investment moves away from the energy industry, is the primary driver of the rate. This is especially evident in reduced consumer spending and confidence in regions strongly associated with the energy industry. However, unemployment is likely to decline in the latter part of 2015, as structural changes mean that jobs will be created in Non-Energy-Exporting (NEX) industries.
The Ivey PMI, which surveys businesses to reflect the economy as a whole, saw a decline to 47.9 in April. However, as the effect of lower oil prices dissipated, May and June posted strong PMI results at 58.2 (49.2 exp) and 62.3 (55.3 exp) respectively. The results in the latter part of the quarter are representative of expansion likely driven by fresh investment in NEX industries.
MONETARY POLICY:
The Bank of Canada (BOC) continues to take a long-term view of inflation targeting and the economy. The central bank has not taken any action on interest rates throughout the quarter and subsequently, rates remain on hold at 0.75%. Underlying inflation still remains below the bank’s targeted 2.0% rate, with June’s CPI y/y reporting at 0.9%. However, June’s Core CPI y/y still remains relatively buoyant at 2.2%.
It is therefore likely that the BOC will hold off on any further rate cuts until they see the net result of investment capital moving into the non-energy sectors. It should also be noted that the current depreciation of the Canadian dollar, coupled with strong productivity growth in the labour markets, has significantly increased Canada’s export competitiveness. Subsequently, any case for further monetary easing will need to be supported by a broad range of negative indicators.
FISCAL POLICY:
The Canadian government continues to be committed to returning the budget to surplus in the near term. Current forecasts from the government have a small surplus of C$1.4 billion being achieved in the 2015/2016 fiscal year. However, it should be noted that any obtained surplus will be partially inflated by the government tapping the contingency reserve fund, to the tune of C$10 billion, to fuel additional purchases within the budget.
The government has also sought to introduce a range of fiscal initiatives to stimulate growth within the economy. The Manufacturing industry is set to benefit from a range of accelerated capital cost allowances to the amount of C$1.2B, in particular to support the auto parts industry. Small business has also received some fiscal support via a tax cut at a cost of over C$1.2B. Also, as a cornerstone of the Canadian government’s drive to stimulate consumer demand, a significant family tax cut was introduced.
FX OUTLOOK:
The Canadian dollar continues to remain depreciated, thanks to the decline of global energy prices over the course of the quarter. The USD now appears well entrenched above the $1.20 level against the Loonie.
Looking ahead, the timing of the US Federal Reserve’s rate rise will be a key factor in the direction of the Canadian Dollar. Any move by the Fed to raise rates will fuel further US Dollar strength and is likely to result in the pair trading well above the $1.30 level. Although we predict the chance of a further rate cut by the Bank of Canada as limited, any deteriorating economic conditions in the latter part of the year, could see more easing and send the Loonie soaring.
This is a Guest Editorial which was compiled by and reflects the perspective of Steven Knight, Research Analyst for Blackwell Global