Bearish on the CAD in 2017 - RBS

Research Team at RBS remains bearish on the CAD in 2017 as both business investment and export growth have each underwhelmed the Bank of Canada’s expectations in 2016.

Key Quotes 

“There has been some tentative evidence that business confidence has bottomed of late, likely aided by the bounce in oil prices off the early 2016 lows, but we think US President-Elect Donald Trump’s election creates new uncertainties for US and Canadian businesses that may linger, even if Trump’s tax and infrastructure plans ultimately prove positive for the US economic outlook. Trump’s rhetoric on NAFTA has clearly focused on Mexico, but Canada’s trading relationship with the US, even if little changed through the process, is nevertheless facing new uncertainty. Inflation pressure has slowed - the core CPI rate, at 1.7% y/y, is not far from the 2.0% target but is at a 2-year low.”

“The Canadian government introduced fiscal stimulus in 2016, including a Child Care benefit payment that is expected to support consumer spending. But the boost comes amid a still-soft employment picture. Full time jobs have actually contracted overall in the first 10 months of 2016, leaving part-time employment responsible for all of Canadian net jobs created in 2016. At the same time, housing market restrictions, both at the provincial level and at the federal level, may slow the housing market in 2017 – that could reduce consumer confidence in the outlook.” 

“We think the risks of the Bank of Canada reducing its policy rate in 2017 are under-priced. To be sure, the Federal Reserve may do some of the heavy lifting for Canada, widening monetary policy divergence through rate hikes of its own. But inflation pressure in Canada is moderating, growth has been persistently weaker than expected, and housing price moderation could alleviate financial stability concerns that would accompany a rate reduction. We see USDCAD testing above 1.40 in the H1’17.”