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Canada

Markets

Currency Profile

Although it is often considered a "petrocurrency", the direction of the Canadian dollar (or loonie – a reference to the bird on the one-dollar coin) is driven chiefly by broader changes in global risk appetite and the interest rate differential between the US and Canada. A historic link to commodity prices has weakened to some extent in recent years—a reflection of how US shale production has made terms-of-trade fundamentals look more similar on both sides of the 49th parallel. Conversely, increasing levels of household and corporate debt have made the loonie more sensitive to local and global financial stability concerns.

Outlook
Economics
Markets

Canada

Spot Exchange Rate

Indicative Interbank Spot Exchange Rate, Price of 1 US Dollar in Canadian Dollars, Updates Daily

The spot exchange rate is the indicative exchange rate applied to interbank foreign exchange transactions that are settled on the spot date – typically within two working days. The “base currency” is the first currency appearing in the pair, followed by the second part of the quotation, called the “counter currency”. The exchange rate indicates how much of the counter currency is needed to buy one unit of the base currency.

Canada

Year to Date Performance

Gain or Loss Relative to USD, Year to Date, Updates Daily

Represents the percentage change in the nominal exchange rate relative to the US dollar year to date.

Canada

Annual Movement

Year-To-Date % Change in CADUSD Exchange Rate, Adjusted for Breaks, Updated Daily

Historical Movement compares this year’s exchange rate movement – the thick black line – with movement in previous years – the thinner blue lines – to illustrate the degree to which the rate has moved. Performance is equal to the percentage gain or loss in the exchange rate realized over the number of trading days shown on the horizontal axis.

Canada

Trading Ranges

Maximum Absolute Change in USDCAD Exchange Rate Calendar 1- or 3-Month Periods, Updates Monthly

Trading Ranges are equivalent to the difference between maximum and minimum exchange rates – expressed as a percentage of the opening USDCAD exchange rate – over each calendar one- or three-month period.

Canada

Probability Analysis

Estimated USDCAD Expiration Range By Confidence Interval, Updates Daily

The Probability Analysis chart, based on a standard deviation bell curve, uses realized historical volatility to illustrate the likelihood that the exchange rate will end within a defined trading band at expiry. For example, we can be confident that 85 out of 100 times, the exchange rate will fall within the upper and lower bounds shown at the 85% confidence interval – and the exchange rate could end above or below these bounds in 15 out of 100 cases. Please Note: The confidence intervals depicted are generalized measures of probability based upon a parametric/ delta-normal analysis of a 5-year historical distribution of market movements, and are used to estimate the exchange rate uncertainties associated with different currencies and time periods. Smaller or larger movements than those outlined are possible. In currency markets specifically, major political and economic events can trigger moves that exceed any historically-driven model parameters.

Canada

Forward Differential

Indicative 12-Month USDCAD Forward Points, Updates Weekly

The 12-month forward differential quantifies the difference – expressed in basis points – between the prevailing spot exchange rate and a 12-month outright forward contract. This difference does not express a directional market view on future spot rates, but is instead derived from the gap between the interest rates in the two currencies in the pair. The differential can be positive or negative depending on which currency has the lower or higher interest rate, with the higher yielding currency discounted going forward and vice versa.

Canada

Forward Curve

Indicative 12-Month USDCAD Forward Points by Month, Updates Weekly

The forward curve illustrates the difference – expressed in basis points – between the prevailing spot exchange rate and outright forward contracts for various future dates. These differences do not express a directional market view on future spot rates, but are instead derived from the gap between the interest rates in the two currencies in the pair over each period. The differential can be positive (premium) or negative (discount) depending on which currency has the lower or higher interest rate, with the higher yielding currency discounted going forward and vice versa.

Canada

Yield Differential

2- and 10-Year CAD-USD Government Bond Yield Differential, %, Updates Weekly

The Yield Differential chart illustrates the difference between 2- and 10-year Canadian government bond yields and their equivalent US Treasury yields. Positive values indicate a higher yield in Canadian dollars than in US dollars, while negative values imply the opposite.

Canada

Speculative Positioning

Net Long (+) or Short (-) Canadian Dollar Futures Position, Billions US Dollars, Updates Weekly

The Commodity Futures Trading Commission's weekly Commitments of Traders report provides a breakdown of the net positions for "non-commercial" (speculative) traders in US futures markets. Market participants follow the data to identify extreme long or short positions in a currency - something that can signal a trend reversal.

Canada

Purchasing Power Parity

Canadian Dollar, Under (-) or Over (+) Valuation vs. US Dollar, OECD PPP, Updates Daily

Purchasing Power Parity measures whether market exchange rates are theoretically overvalued or undervalued. Purchasing Power Parities are conversion rates that attempt to equalize the purchasing power of different currencies by eliminating the differences in price levels between countries. Note that market rates can deviate from Purchasing Power Parity rates for years, even decades, at a time – so cannot be used to reliably forecast future exchange rate movements.

WORLD

USD

CAD

MXN

EUR

GBP

CNY

JPY

AUD

+ Global

+ United States

+ Canada

+ Mexico

+ Euro Area

+ United Kingdom

+ China

+ Japan

+ Australia

USD doldrums continue
03 December, 2023
• Fed speak. Some measured comments by Chair Powell & weaker ISM data reinforced expectations the next move by the Fed could be a rate cut.• USD weaker. The drop in US bond yields has exerted more pressure on the USD. AUD has risen back up to the top of its multi-month range.• Event radar. Locally, the RBA’s last meeting of ’23 & Q3 GDP are due. Offshore, focus will be on US labour...
Canadian jobs growth tops expectations, but details point to slowdown ahead
01 December, 2023
The Canadian job creation engine topped forecasts in November, firming expectations for another hold at the Bank of Canada’s meeting next week. 25,000 new positions were added in the month, with population growth and still-high participation rates pushing the unemployment rate to 5.8 percent, up from 5.7 percent in October. Consensus estimates had pointed to a 15,000 new hires, with unemployment rising...
The peso’s bull run has run out of steam.
01 December, 2023
After a world-beating drive higher, the Mexican peso lost momentum late in the third quarter and has largely failed to regain it, staging a relatively modest rebound against a retreating dollar. Several factors are in play: A drastic increase in government spending plans – coming ahead of the presidential election in June 2024 – spooked investors. The foreign exchange commission’s decision to unwind...
The fiscal outlook still looks favourable.
01 December, 2023
Under President Andres Manuel Lopez Obrador’s recently unveiled budget plan, Mexico will run its largest deficit since 1988 next year – amounting to roughly -4.9 percent of gross domestic product, up from this year’s -3.3 percent. With global interest rates holding near post-2000 highs, higher borrowing costs could threaten credit ratings and limit the next government’s room for maneuver.  But...
Nearshoring hopes look overdone.
01 December, 2023
With geopolitical tensions between the US and China forcing businesses to diversify supply chains, the country’s stability, low labour costs, and geographic proximity have raised hopes that a “Made in Mexico” moment is at hand. Indeed, the country has displaced China as the United States’ largest trading partner. Share of US imports, 12-month moving average, % But under López Obrador,...
Canada's economy is slowing.
01 December, 2023
With higher borrowing costs and slowing credit growth inflicting serious pain on Canada’s spectacularly indebted private sector, the economy appears poised for a hard landing. The direction of travel for residential investment is clearly down: after an early-2023 dead-cat bounce, prices and activity levels are subsiding across the country, and developers are moving to the sidelines. Energy prices...
Expectations are falling.
01 December, 2023
Market illusions about the relative resilience of Canada’s economy have been exhausted in recent months, and swap-implied rate projections for the Bank of Canada and the Federal Reserve have converged in a dramatic fashion. Yield differentials and the loonie have come under sustained pressure, with central bankers on both sides of the border now seen delivering rate cuts at a roughly-similar pace through...
Key supports remain intact. For now.
01 December, 2023
Most of the factors driving the peso’s post-pandemic outperformance are still in place. Implied interest rate trajectories suggest that Banxico will cut more slowly and more incrementally than its Latin American counterparts, leaving the currency with one of the best volatility-adjusted carry profiles in the region. Carry Return Index, 1999 = 100 Remittance volumes keep setting new records....
We're tactically constructive.
01 December, 2023
Over the next month or two, we think economic surprise indices will soften in the United States, with consumer spending and labour market measures weakening relative to still-optimistic market forecasts. Global financial conditions should ease as US yields stabilize, and expected growth differentials should narrow, adding momentum to an already-underway portfolio rebalancing process in major investment...
A US slowdown remains a clear and present danger.
01 December, 2023
We think the peso could temporarily outperform as the Federal Reserve accelerates its communications pivot, but fundamental vulnerabilities should exact a toll over the longer run, contributing to generalised weakness toward the latter half of 2024.We think a sustained period of outperformance in the US economy will fade in the coming months, with the peso likely to come under selling pressure in early...

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