I spoke with BNNBloomberg today about the outlook for the global economy and the Canadian dollar. I talked about the brewing stormclouds and what the FOMC decision on September 21, 2022 is so pivotal. More details are below.

CAD at 22-month low

There are two main drivers for the Canadian dollar, the domestic economy and the global economy.

Domestically, there’s some softness creeping in. The past two jobs reports have been soft

A month ago, the market was saying US and Canadian rate hikes would stop at about 4%. Now that’s pressing higher in the US but it’s not clear that Canada can or should follow. There’s a potential gap opening up there and that’s why the loonie is at the lowest since November 2020.

USDCAD daily

On CPI today

Today: Canada August CPI 7.0% y/y vs 7.3% expected

Some space is opening up between the Fed and the BOC. The Bank of Canada is near its ceiling while there’s still some blue sky for the Fed. Whereas before both could have been seen stopping, we’re now getting the risk of +4.5% from the Fed and the BOC capped at 4%. Moreover, if a global recession hits, Canadian housing continues to fall and commodity prices fall, the BOC could be cutting in short order while the Fed has more of a buffer.

The problem is a falling loonie could cause a feedback loop in inflation.

Deterioration in the global economy

There’s a growing consensus that commodities will be in short supply this decade and that makes Canada the place to be. Over the next year though, that’s not the case. Europe and China are already struggling. North America is slowing down but central banks everywhere are raising rates at an unprecedented pace. There’s a real chance of a policy mistake and recession. Canadian employment has sagged, US retail sales and factory data lately has been soft.

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