Skip to main content

Canada's exchange rate -- beyond parity in 2011

Scotia Capital’s monthly foreign exchange strategy conference call is a great piece of research.  Sutton and Tihanyi do an excellent job on providing both S/T and L/T flavor to the foreign exchange market.  When Canadians talk foreign exchange they talk about the US Dollar, since the vast majority of Canada’s trade flows are with the U.S.

Scotia Capital’s thesis is that over the next 18 months:
(1)               The Canadian dollar will settle slightly over parity with the US dollar, and
(2)               That Canadian short term interest rates will range around 2.25%.

According to Scotia Capital, the factors with the highest level of correlation with a stronger Canadian dollar are:

(1)               Performance of the S&P 500
(2)               Oil Prices
(3)               Direction of the Euro
(4)               Copper prices

In terms of negative correlation the US S&P 500 volatility index presents an almost perfect correlation of -0.95

According to Scotia Capital, the drivers for higher interest rates are inflation and a recovering domestic economy. Interest rates at 0.5% are too accommodative, since real interest rate is now -1.5% (0.5% less 2.0% inflation).  However, despite a broad recovery our economy remains subject to external shocks.  Although housing was the dominant GDP driver over the past 12 months it is now falling back.  The March 2010 GDP growth sources were very well diversified with manufacturing (which had been lagging in the pervious 12 months), mining and energy, wholesale and agriculture.  

Scotia Capital is in the same crowd that believes that interest rates differential between the U.S. and Canada will exceed 0.75% by the end of the year.  However, this is not a sure thing as the Governor of the Bank of Canada said on June 16th: 

While “[r]ecent activity in Canada is unfolding largely as expected”, Mr. Carney emphasized that the “outlook is subject to considerable uncertainties. In most advanced economies, the recovery remains heavily dependent on monetary and fiscal stimulus.” Perhaps the key comment, which is not new, is that “[i]n light of the scale and volatility of these conflicting forces, it should be evident that no particular path for monetary policy is preordained

Part of the problem for the Bank of Canada is that the U.S. is a fiscal mess.  The numbers are daunting. 





The risk then becomes that Canada falls off a cliff because of the neighborhood!

Comments

Popular posts from this blog

Spray painting Taylor Swift G650 aircraft (updated)

 First, a bit of paint will not harm anyone.  These climate activities are going to learn two things in the next few days:  (1) Trespassing at an airport is a felony almost anywhere in the world.  That means criminal prosecution.   (2) removing paint from an aircraft is expensive.   So these climate activists are about to find out the reach of the British criminal system and it will not be pleasant, the UK has very strict laws about that, I would be surprised if cleaning the aircraft of all the paint will cost less than $100,000.     I am sure that when they planned (premeditation) this little show they had a very valid logic to doing this.  Tonight, they are probably realizing the depth of their troubles.   I understand that in the UK it's a minimum one-year jail sentence.    Also, good luck travelling with a criminal trespass charge against you.  I am relatively certain that the airline industry will ...

Janet Yellen from China supporter to Hawk...

There is rarely serious news in the world these days, it seems that most newspapers are filled with headlines and little else, and then Ms Yellen went to China.  Secretary Yellen has long been known in the Biden administration as the voice of moderation when dealing with China, yet as her trip which concluded yesterday a hawk was born:  She warned the Chinese against dumping goods in the United States.    fighting words! The American administration is very concerned about the lack of Chinese domestic consumption.   Even before the COVID-19 epidemic, there were already the beginning signs of a slowdown, automobile sales were off.   China is facing domestic deflation (a clear sign of collapsing demand) China imports few consumer goods, they import raw materials and intermediary goods.   It seems that the American administration is concerned that the Chinese administration will dump consumer goods abroad to keep its manufacturing machinery ...

Farm; Half year performance

 People appear to be genuinely curious. 2024 has been a record first half for the farm.  The addition of high tunnels has greatly impacted our revenues.   While we expected Q1 profits to be higher, it really was the second quarter that produced the goods.  The terrible weather has greatly impacted the production of high-end vegetables. Energy costs are now very stable and have become a fixed variable especially now that our bio digesters are fully dialled in.   Replacing some of our pre-dryer equipment was covered under warranty, and the new equipment is far better at dealing with gas moisture, and much better steel!   Our diesel costs are what they are! Our biologist and ecologist devised a new planting plan for our high tunnels that greatly reduced pests, especially slugs.   We have seen a 90% decline in sluggs this year, resulting in better yields.   It seems that several plants act as natural repelants and if planted c...