CAD Canadian Dollar Meets Reality

The Canadian dollar is the day’s worst performing currency after the central bank lowered its growth forecasts for 2013 and toned down its previous language with respect to future policy tightening. The Bank of Canada lowered its 2013 GDP growth outlook to 2.0% from the 2.3% estimated in October.

The BoC indicated “the slowdown in the second half of 2012 was more pronounced than the Bank had anticipated” and that the slowdown in inflation has been more pronounced than anticipated.

Weakness in business investment and exports, high debt levels and a resulting slowdown in household spending were cited as the main courses to downside risks.

Readers of this column were warned against reading too much in the Bank’s seemingly hawkish remarks from its October policy report, when it stated that “some modest withdrawal of monetary policy stimulus will likely be required”. We argued in October 23 against those expectations, citing “three obstacles to this much-talked about Canadian tightening”.

CAD losses extended when the BoC concluded its policy announcement when it stated that “the timing of any such withdrawal is less imminent than previously anticipated.”

Canadian macro metrics have deteriorated markedly as seen in the Ivey PMI on manufacturing, which fell to 43.10 in December –lowest since January 2011. The employment component of the index dropped to 46.10– a 33-month low. Retail sales are also at their lowest in nearly three years, growing by a mere 1.4% y/y in November. The jobs front may be the only stabilising sector, with the unemployment rate hitting four-year lows at 7.1%.

Canadian technicals are moving from bad to worse especially against the US dollar, euro and Aussie. The latter two currencies present further upside than the greenback. AUD/CAD is expected to preserve its run and is likely to retest 1.0790s. USD/CAD breaks its 200-DMA for the first time since November and is expected to extend gains towards 1.0050-70. Choppiness towards 1.01 cannot be ruled out but so far appears doubtful. A break below 0.9800 will cast doubt on the recent run-up. EUR/CAD has staged an impressive 10% recovery over the past five months and is slated for targeting 1.38—as a preliminary target in its reverse head & shoulder formation.