Feb 25, 2015 Question of the Week

by Richardson GMP

Richardson GMPIt has not been the best of times for the Canadian dollar of late.  While most Canadians are aware of the loonie’s poor performance, which has declined 12.7% over the past six months against the U.S. greenback, we thought we’d take a look at how it has held up against some of the other major currencies worldwide. The results are a mixed bag as the Canadian dollar has marginally outperformed some of its counterparts but also materially underperformed others.

First the good news.  Over the past six months the Canadian dollar has outperformed the Australian dollar and the Euro.  To some degree Australians are in a similar boat to Canada as their economy is tied to commodity prices and their central bank also recently cut interest rates, although from a much higher level. Australia has likely underperformed Canada since it has a higher dependency on China and growth in that part of the world is not expected to accelerate in the near future.  As for the Euro, considering the European Central Bank is about to embark on buying about one trillion Euros worth of assets we’d certainly hope the Canadian dollar would manage to outperform the Euro.  In fact it would have been more reassuring to see the 2.5% six-month outperformance level much higher at this stage.  We can say the same for the Japanese yen as that country has also initiated a substantial level of quantitative easing to keep bond yields low.  So, while the Yen’s six-month outperformance of the loonie has only been 0.4%, one would hope that the Canadian dollar would be easily outperforming its Japanese counterpart at this stage.

Now for the more disappointing news.  The Canadian dollar has materially underperformed the Swiss franc, British pound and US dollar.  We’re going to give the loonie a free pass on the Swiss franc underperformance as it has predominantly been driven by the Swiss Central Bank’s decision to unpeg its currency from the Euro.  Up until that decision the Canadian dollar was actually holding its own against the franc.  But the pound and the U.S. dollar are a different situation as economic performance in both countries has been relatively stronger for at least the past year.  Furthermore, while the Bank of Canada recently cut interest rates the Bank of England is not expected to follow suit and the Federal Reserve has a rate increase in its future rather than a cut.

So is it possible that we may see some support for the loonie going forward or will currency traders still have the Canadian dollar on their sell list?  Well there are a number of factors that influence the loonie, but three scenarios where you could see some support, albeit possibly short-lived for the loonie, include:

  1. A bounce in Canadian economic growth.  Considering the effects of the decline in the oil and gas sector haven’t likely flowed through to Canadian GDP figures, this scenario in the short term is unlikely.
  2. A bounce in commodity prices.  While recent volatility could provide some very short term swings, a longer, material, sustainable, fundamental rebound in commodity prices over the next couple of quarters is also unlikely.
  3. The Bank of Canada does not cut rates further.  Following the recent 25 basis point cut in January, it seemed every economist did an about face on their forecasts and started calling for another cut coming up in March with the possibility of a third in April.   While there are reasons to questions these forecasts, the market has started to partially price in the probability of at least one more cut.  If such a cut does not materialize then a short term bounce in the Canadian dollar is a possibility.

So what’s the take away here?  First, the outlook for the Canadian dollar overall remains murky until we get a better handle on where interest rates and commodity prices are headed going forward.  But second, vacations to the land down under and Europe may look more attractive in 2015 instead of visiting the Queen or Mickey Mouse.

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Source: Richardson GMP Limited
The opinions expressed in this report are the opinions of the author and readers should not assume they reflect the opinions or recommendations of Richardson GMP Limited or its affiliates. Assumptions, opinions and estimates constitute the author’s judgment as of the date of this material and are subject to change without notice. We do not warrant the completeness or accuracy of this material, and it should not be relied upon as such. Before acting on any recommendation, you should consider whether it is suitable for your particular circumstances and, if necessary, seek professional advice. Past performance is not indicative of future results. Richardson GMP Limited is a member of Canadian Investor Protection Fund. Richardson is a trade-mark of James Richardson & Sons, Limited. GMP is a registered trade-mark of GMP Securities L.P. Both used under license by Richardson GMP Limited.


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