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Canadian Dollar Still Friendless After GDP; Fair Value Much Lower

After a friendless Friday, the Canadian dollar has continued to lose value at the start of the new week. Now worth C$1.332 per USD, the loonie is at a 12-day low, but it has far further to fall if CIBC’s fair value estimation of C$1.4 is anything to go by.

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In the past 28 trading hours, spanning Friday and Monday, the Canadian dollar has lost the best part of 2 cents against the US dollar. Monday’s USD/CAD rate of C$1.332 marks the loonie’s weakest level in 12 days.

Other notable exchange rates include GBP/CAD, which spent Monday morning trading at levels in excess of C$1.76—the Canadian dollar’s lowest level against the pound since last June.

Following Friday’s dismal Canadian GDP data, which showed the economy contracting in December and growing at its slowest quarterly pace in 2 ½ years, traders now have sufficient incentive to adjust their currency positions to reflect a lower likelihood of future interest rate hikes by the Bank of Canada.

USD to CAD - 1 Week chart to 04 Mar
USD/CAD - 1 Week chart to 04 Mar

In a note on the Canadian economy, CIBC Capital Markets’ chief economist Avery Shenfeld wrote: “If not for a huge employment gain in January we’d be worried about an outright recession.”

Moreover, the weak GDP reading now makes Wednesday’s Bank of Canada meeting “of interest only to the extent that Governor Poloz pulls further back from his talk about normalizing rates towards 3 percent.”

Shenfeld offered a simple conclusion: “Negative for the Canadian dollar!”

As for targets for currency depreciation, readers can look to yet more opinion from CIBC, this time from CIBC Research.

“Since the financial crisis, the Canadian dollar has been trading stronger than our econometric model would have implied using commodity prices and interest rate spreads. One factor not captured in that model was the greater attractiveness of Canadian securities to international investors. However, last year saw the smallest net inflow into Canadian securities in a decade. As such, there’s a clearer path for USD/CAD to reach something closer to its modelled fair value, which is around C$1.40.”

A move to C$1.40 to the US dollar would take the loonie to its lowest level since early 2016.


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