The upside looms for USD/CAD
The Bank of Canada is wrong about the Canadian economy and they're going to have to face it sooner or later.
The BOC is being stubborn in maintaining that it will hike rates later in the year but they're going to give up, maybe next week (March 6 decision) but probably in April after the Business Outlook Survey shows slower investment and hiring intentions.
My base case is that we revisit the December high of 1.3650 sometime later this year. After today's weak GDP print, that may be faster than anticipated.
I went back and read through the Bank of Canada's January Monetary Policy Report. It's where they outline and detail forecasts for the economy. They believed that a non-oil investment jump was coming and that consumer spending would be positive, albeit growing at a slowing pace. They have also been wrong about housing for the past year.
On investment, it was extremely poor in the GDP report outside of IP:
Moreover, I have been deep in Canadian corporate reports for weeks and no one is talking about investing. All the extra cash flow is going towards debt especially any company with high leverage. In companies with Canadian and foreign operations, all the investment is going abroad.
On consumer spending, they thought lower gas prices would boost consumption. In Q4, gas prices sank and here are retail sales. There's been a contraction in spending since August.
On housing, it's no better. Canadian inventories are still tight, which is a positive, but prices are falling in the major cities. The latest numbers on building permits and existing home sales were good but the trend is weak.
The upside scenario is mostly politics. It looks like the US and China are going to get a deal. I think it's entirely priced in now and that makes me worried because we just saw Trump walk away from the table with Kim at the final hour.
Naturally there is oil. OPEC is doing Canada a huge favor right now by pushing up crude prices and if they stick to it and get WTI back to $65 you will start to see Canadian companies investing in production growth. But so much hinges on whether shovels are in the ground on Keystone, Line 3 and TransMountain.
For the Federal government there's a budget coming up and I'm guessing you're going to see some short term spending. Provincially is a black eye right now. The Ontario government hasn't done anything for the economy since taking power in June 2018 and they're still talking about deficits. At best they do something to make it easier to build houses. There will be an Alberta election in May and the Conservatives will win. The best hope is that they're ready with a plan on Day 1 to get the oil and gas industry moving.
The catalyst for the next leg of weakness in the Canadian dollar will be the BOC. They are the only major central bank that retains a hawkish bias. That's gone this month or in April and they will signal the risk of a rate cut soon after.
