The Canadian dollar lost ground to the US dollar in January mostly due to a relatively dovish statement from the BOC. A rate hike is not that imminent. Did anybody think it was really coming that fast?
And, Canada’s neighbor to the south has a much more dovish monetary policy – open ended QE, and lower rates until unemployment drops to 6.5%. Unemployment has just risen.
* This article is part of the February 2013 monthly forex report. You can download the full report by joining the newsletter in the form below.
The Canadian economy is still doing very well:
- Unemployment dropped to 7.1% and the nation enjoyed a big gain in jobs in December. Good news is also expected for February. Canadian job reports can often be volatile, but the general trend is certainly positive.
- GDP for November rose by 0.3%, more than expected and showing a continued positive trend. With an improving situation in the United States, demand for Canadian goods remains strong.
- Oil prices are on the rise: WTI is not that far from the $100 line, and this supports the loonie. Optimism about global growth underpin the status of the C$ as a “commodity currency”.
On the other hand, worries come from the housing sector: headlines like “how low can it go?”, a drop in building permits, an expression of worries from the BOC and talk that the bubble is bursting all weigh on the loonie and could force a rate cut later in 2013.
No change in policy is expected in February. Mark Carney still has a few months as the head of the BOC, and he isn’t expected to make any dramatic changes before he leaves.
All in all, the advantages that Canada has outweigh the disadvantages and a weaker loonie seems unjustified. So, after reaching 1.01, USD/CAD has potential to fall.
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