As Goes Canada's Economy, So Goes Its Currency

Includes: CNY, EWC, FXC, IFNA
by: Andrei Tratseuski

The rapid turnaround in the Canadian economy can be clearly seen in the price of the loonie.

On countless occasions, economists and traders predicted that parity is in the making between Canada and its bigger neighbor to the south. Manifestation of the following has reasonable backing.

Canada is currently in the midst of a tightening cycle, the emerging stage, and its economy is performing relatively well compared to other nations. The only room for concern was a sharp drop in the Retail Sales the previous month. Aside from a couple of flukes, the economy is preforming relatively well. The manufacturing sector and rising commodity prices are the catalyts for an unparalleled performance. The economy continues to create a slow but steady steam of employment, meanwhile Exports are continuing to drive the economy to the upside. Overall, things are getting relatively better as time progresses. (Click to enlarge)

The economy is expanding at a progressively robust rate. The Canadian central bank expects growth of 3.8% for the remainder of the year. The following shows the best expansion rate out of nearly all developed nations. The only nation that might outperform Canada at this juncture can be Australia. Nonetheless, the race to sell commodities is on, and any nations that can produce more of valuable materials will come on the top. As long as commodity prices remain at current level or head higher, the Canadian economy as well as its currency will be the primary beneficiaries.

All things aside, the markets are predicting that the Bank of Canada will increase its interest rates in the upcoming meeting. Currently the rates stand at 50 basis points and are expected to be raised by an additional 25 bps. The overwhelming demand out of China for raw materials, along with timid growth in the US, should provide a relatively solid growth potential for the Canadian economy. However, the biggest driver for the loonie will be the increasing amount of funds flowing to the country due to the exports. The following will likely give the Canadian dollar legs to reach parity with the United States dollar during the year. Return of risk appetite in the markets adds to a rise in the loonie.

Disclosure: Short USD/CAD