MARKET MOVER - BNP PARIBAS - Investment Services India

This section is classified as non-objective research
trend. The only variable of the GDP formula that will
remain flat is government consumption as the
government continues to cut its fiscal deficit in a bid
to achieve a balanced budget by late 2014/early
2015.
Chart 4: USDCAD vs. DJIA
With the economy set to grow at trend of 2.1% in
2013, the Bank of Canada (BoC) will likely cut rates
in mid-2013, but at a gradual pace. Despite the
global backdrop and the increased market volatility in
recent months, the BoC has maintained a tightening
bias in its statements, while acknowledging the risks.
Inflation in Canada remains subdued and well below
the BoC’s 2% target. The bank is in no rush to lift
rates, but expected green shoots in the economy
should see it hiking in 2013.
As one of only two central banks (the other is
Norway’s Norges Bank) looking to hike in 2013, the
CAD stands to benefit, standing out in an
environment in which central banks have made it
very clear that monetary policy will remain stimulative
for a long time. Expectations of a hike from the BoC
should push USDCAD to new lows, 0.92 by the end
of Q3 2013. A stronger CAD may not be in the BoC’s
favour, but USDCAD below parity has become the
new norm for Canada and it looks like the economy
will have to adjust accordingly. The strength of the
CAD will be less of an issue if the economy sustains
trend growth.
Besides the potential risks in the global economy i.e.
a slower-than-expected Chinese recovery, the US
fiscal cliff, resurfacing concerns over the eurozone,
Source: Reuters EcoWin Pro, BNP Paribas
the Canadian economy faces some of its own.
Household debt continues to rise and a potential
correction to the housing market would devastate the
economy. However, our main scenario is that the
global economy will improve into 2013, which should
help the Canadian economy avert these risks.
While we are bullish on the CAD and expect it to
outperform its commodity-currency peers, particularly
the AUD, we are reluctant to recommend a long CAD
trade. Current positioning in the CAD looks
overstretched and suggests limited potential upside
from here. We think any pullbacks in the CAD would
offer good buying opportunities.
FX Strategy / Mary Nicola 20 September 2012
Market Mover
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