MARKET MOVER - BNP PARIBAS - Investment Services India

This section is classified as non-objective research
CAD: A Leader in the Commodity Bloc
• Fed and ECB policy will remain supportive of
the CAD.
• The BoC is likely to hike rates in mid-2013.
• USDCAD is heading for a low of 0.92 by Q3
2013.
Chart 1: US GDP vs. Canadian GDP
The commitments by the Federal Reserve and the
ECB to support the markets suggest that a risk rally
is set to ensue for the unforeseeable future. The Fed
intends to keep US interest rates low until mid-2015
and buy bonds until the US economy improves and
unemployment declines. The ECB will help to reduce
risk premia in the eurozone by buying the short-dated
government bonds of the peripheral countries once
they sign up to an EFSF/ESM programme. With the
central banks almost suppressing volatility in the
markets, the environment bodes well for risky assets.
We are most bullish on commodity currencies into
year end, but expect the CAD to outperform its peers
into 2013. We believe USDCAD is likely to drift to
0.9200, a new low, by mid-2013.
Source: Reuters EcoWin Pro, BNP Paribas
Chart 2: USDCAD vs. USD-CAD 2yr Swap
Ratio
The Fed and ECB policies allow investors to pile into
higher-yielding assets. The Fed’s policy stance, in
particular, ensures that the USD will once again
become the funding currency of choice. USD
weakness is set to take hold until the Fed stops
purchasing bonds at the end of 2013 or in mid-2014.
Open-ended QE may translate into a USD1-1.5trn
expansion of the Fed’s balance sheet, making it one
of the most aggressive central banks on the stimulus
front.
The Fed’s goal to get the economy back on track
bodes well for those economies most dependent on
the US, not least Canada. With 70% of Canadian
exports destined for the US market, the likely
improvement in consumption in the US should boost
growth in Canada. Indeed, we expect Canadian
exports to outpace imports heading into 2013, not
only because of the improvement of both the US and
the global economy, but also the rise in oil prices.
The Fed’s stimulative policy will push up oil prices,
improving Canada’s terms of trade as an exporter of
oil. After Q3, exports are expected to make a positive
contribution to Canadian growth.
Source: Reuters EcoWin Pro, BNP Paribas
Chart 3: CAD TWI vs. Brent
While Fed policy is crucial to the outlook for the CAD,
the domestic backdrop also remains supportive.
Business investment, which has been a key
contributor to growth, thanks to investment in mining,
should continue to expand at a solid pace. In
addition, personal consumption is likely to grow near
Source: Reuters EcoWin Pro, BNP Paribas
FX Strategy / Mary Nicola 20 September 2012
Market Mover
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