CAD Analysis – 13th of April

Jarratt Davis

Special Consultant to the FPA
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CAD is a neutral currency at present as BOC remain satisfied with economic developments and has signaled no bias for further easing. Core inflation close to target and the oil price has started moving higher during late February and March which bodes well for the resource exporting nation. Further upside in WTI will make the CAD a buy on pullbacks against weaker currencies.

CAD Analysis

Interest Rate

Overnight Target Rate: 0.50%

Last Change: July 15, 2015 (0.75%)

Expected Future Change: On hold

Next decision: April 13

Inflation

Inflation Target: 2% (1-3%)

Period: Year ending February 29

CPI: 1.4% Prior: 2.0%

Core CPI: 1.9% Prior: 2.0%

Next Release: April 22

Employment

Period: March

Employment Change: 40,600 Expected: 10,000

Unemployment Rate: 7.1% Expected: 7.3%

Next Release: May 6

Growth

Period: January

GDP: 0.6% Expected: 0.3%

Next Release: April 29

The Canadian dollar rallied over 1,800 pips against the US dollar between January 20 and March 31, before entering a consolidation phase during the first half of April. This move marked a significant reversal and the end of a stellar depreciation of the CAD against the USD of over 5,000 pips which commenced in mid-2011. The recent strength in CAD was prompted by the Bank of Canada’s January 20 statement which displayed a neutral outlook on monetary policy, however also acknowledging the detrimental effects of lower oil prices. The BOC’s January statement served a support base to falling CAD by showing that the Bank does not need to ease monetary policy due to the steep depreciation of the currency, which has inflation-boosting effects of its own.

The strength in CAD was augmented in February as the price of WTI created a bottom around $28 and proceeded to rally to over $40 per barrel during March, thereby erasing all the losses since early December. Part of the upside in oil was induced by comments regarding an OPEC and non-OPEC meeting on April 17 wherein output would be frozen. The general consensus however is that without Saudi Arabia agreeing to freeze production, any agreement between other members would be inconsequential and insufficient. Saudi Arabia however have stated they will not freeze production without Iran, and Iran refuses to make any agreement until it reaches pre-sanction output levels.

The March 9 BOC statement saw the Bank hold their neutral stance and was generally upbeat, with the Bank seeing economic developments play out largely in line with their forecasts in their January Monetary Policy Report. The result of the release was further upside in CAD as the market received confirmation that rates are on hold.

Released on April 8, Employment for March was excellent; the Unemployment Rate ticked back down to 7.1%, a 0.2% improvement from February’s reading. And 40,600 jobs were added, well above the 10,000 expected. At the same time WTI extended on its $5 rally which helped boost the CAD across the board.

Gross Domestic Product for the month of January printed at 0.6% m/m, above expectations of 0.3% and December’s print of 0.2%. GDP y/y also beat market expectations, printing at 1.5% above market consensus of 1.0% and Decembers reading of 0.5%. At 0.6% GDP m/m for January was the highest reading since September 2013. The main upwards driver came from manufacturing data, rising 1.9% on the sales of autos and parts as well as fabricated metal products.

February inflation saw the CPI rise 1.4% y/y and 0.2% m/m. Both were below expectations. Core CPI was 1.9% y/y, below 2% expected and 0.5% m/m as expected. The monthly rise in core CPI was solid however the y/y figure is now slightly below the BoC’s target of 2%. Further declines in inflation will increase chances of a rate cut however further upside in the oil price will add to economic growth.

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