Forex Investment and Currency Trading

The outlook for the Canadian economy is tightly linked to the US outlook, given strong trade links. With a recession in the US now likely in 2008, market also looks for weaker Canadian growth. Canadian economy is now expected 1.5% growth in Q1 and 1% growth in Q2 and Q3. On this basis, the BOC is expected to deliver additional easing. Market forecast 100 basis points of BOC cuts by mid-2008. The recent commodity prices trading down also negatively impacted the Canadian economy.

All told, key Canada specific fundamentals (monetary policy direction, global growth trends, lower commodity prices) point to CAD weakness. But relative to the USD, which is itself under pressure, we don’t envisage material weakness on a 3- to 6-month horizon.

The CAD has moved into ‘expensive’ territory. Governor Dodge, in his speech, implied that the strength of the CAD had tightened financial conditions, indicating rising concern from the BOC.

M&A flows less supportive: Canada has benefited from strong FDI inflows in recent quarters; however, analysis of M&A trends suggests that in the past couple months more Canadian targets abroad were announced than foreign interest in Canada. This probably reflects the strength of the CAD, which has helped lower the bar to investments abroad.

CAD correlations breaking again: The CAD has once again assumed a life of its own, trading independently from Dollar trends and shifts in rate differentials. In particular, the CAD has weakened significantly over the last month, even if US rate expectations have dropped significantly more than Canadian rate expectations. A weaker outlook for commodity prices (related to risk aversion and uncertainty about global growth) is likely to have been a key influence here, as is positioning unwinding after a long bull run. Higher asset market volatility generally is probably also playing a role in reducing correlations.