Following steady moves to the upside, the Canadian dollar has drifted lower in the past week, supported by a pullback in oil and base metal prices as global growth moderates in the months ahead, which will drag down Canada’s terms of trade and undermine the C$:
The C$ will find it difficult to secure strong buying interest, especially if global commodity prices weaken further. Any sustained slowdown in the US economy would also tend to damage the Canadian currency. The unfolding US and global economic slowdowns indicate the strength in C$ won’t last. A moderation in Canadian growth is inevitable given the strong correlation with the US business cycle. Canada’s manufacturing exports are already contracting as US demand softens. The Canadian economic data has been generally disappointing over the past few weeks with GDP growth slowing sharply for the second quarter while manufacturing has remained generally weak. The headline July inflation figure was distorted by the drop in sales tax with the annual rate dropping to 2.4% from 2.5% while the core rate was held to 1.5% compared with the 2.0% target. The BoC should be able to keep interest rates unchanged in the short term, especially with unease over industrial trends, although a rate increase later in the year should not be discounted. Confidence in the economy remains strong with further capital inflows and the trade position will remain robust with support from high commodity prices.
Overall, there is likely to be a slightly weaker Canadian dollar trend over the next quarter, although losses against the US dollar will be contained by US vulnerability. There are two ways you can play this. First, and the best way, is to go long USD/CAD currency. The second, you could short sell the Canadian ETF iShares Canada Index (NYSEARCA:EWC).