USDCAD OUTLOOK CAMILLA SUTTON l CHIEF FX STRATEGIST l416-866-5470 l CAMILLA.SUTTON@SCOTIABANK.COM June 2013 DIAL IN: 905-694-9451 (local to Toronto) PASSCODE: 6045472# CONFERENCE CALL COMMANDS Press 1 Skip backward 5 seconds; Press 3 Skip forward 5 seconds Press 4 Skip backward 5 minutes; Press 6 Skip forward 5 minutes Press 5 Pause the playback
SCOTIABANK: FORECAST FX - USD performance is mixed REAL GDP - US outperforms Canada 2011 2012 2013f 2014f 00-11 2012f 2013f 2014f USDCAD 1.02 0.99 1.02 1.00 US 1.8 2.2 2.1 2.7 CADUSD 0.98 1.01 0.98 1.00 Canada 2.2 1.8 1.6 2.3 AUDUSD 1.02 1.04 1.02 1.08 Mexico 2.2 3.9 3.0 4.2 EURUSD 1.30 1.32 1.25 1.23 Euro Zone 1.4 (0.5) (0.7) 0.7 GBPUSD 1.55 1.63 1.45 1.44 UK 1.9 0.3 0.6 1.1 USDJPY 77 87 105 110 Japan 0.8 2.0 1.4 1.5 USDCNY 6.30 6.23 6.10 6.04 China 9.4 7.8 7.9 8.0 INFLATION - Expected to remain contained INTEREST RATES - Remain accomodative US 1.9 1.5 2.1 Q412 Q413 Q414 Canada 0.9 1.6 1.9 FED 0.25 0.25 0.25 BoC 1.00 1.00 1.00 COMMODITIES - Yearly averages ECB 0.75 0.50 0.50 Oil (WTI) 94 94 96 BoE 0.50 0.50 0.50 Gold 1,670 1,450 1,350 BoJ 0.10 0.10 0.10 RBA 3.00 2.75 3.25 1
G4 WHO WILL BEAR THE BRUNT OF CURRENCY APPRECIATION? FX RETURNS YEAR-TO-DATE AGAINST USD (up to June 3, 2013) 4.0 2.0 0.0-2.0 CNY MXN SEK EUR NZD CHF CAD NOK GBP AUD JPY -4.0-6.0-8.0-10.0-12.0-14.0 Source: Bloomberg, Scotiabank FX Strategy MAIN THEMES FOR 2013 Central bank policy & spillover effects Politics not just elections by strength of systems Global growth outlook 2
USDCAD S PATH IN 2012 & IN 2013 USDCAD s PATH IN FROM MARCH TO JULY 2012 VS 2013 USDCAD 2013 USDCAD 2012 DOES HISTORY REPEAT ITSELF? 3
CENTRAL BANKS TWO BROAD TYPES OF POLICIES 3 MONETARY POLICY OVERNIGHT RATES Central banks engaged in asset purchases or aggressive policy Central banks not engaged in QE 2 1 0 Japan US Euro UK Source: Scotiabank FX Strategy, Bloomberg Switzerland Canada Sweden Norway NZ Australia TWO TYPES OF CENTRAL BANK POLICIES those who engage in aggressive monetary policies those who are responding to the policies of other nations During the call this was referred to as page 5 4
THE FED: TAPERING & END OF QE BASED ON QUALITATIVE MEASURES End of QE based on qualitative measures, defined as: a substantial improvement in labour markets We define a substantial improvement as: all labour metrics moving in right direction nonfarm payrolls close to 200k/mth for 6mths growth metrics are also important because it is labour outlook more than current situation Source: Bloomberg, Scotiabank FX Strategy During the call this was referred to as page 6 5
THE FED: HOW THE FED JUDGES THE LABOUR MARKET Federal Reserve Bank of Atlanta Interpreting substantial improvement Dec 2007 (Pre-recession) April 2013 Dec 2009 (Empl trough) Marginally attached workers Job finding rate Work part time for econ reasons Initial claims Difficult to fill (NFIB) Temp help services employment Payroll Unemployed Legend for fonts Utilization Leading indicators Employer behaviour Confidence Quits (JOLTS) Source: Federal Reserve Bank of Atlanta Conference board job availability NFIB hiring plans Hires (JOLTS) Vacancies (JOLTS) During the call this was referred to as page 7 6
THE FED: HIGHER INTEREST RATES BASED ON QUANTITATIVE MEASURES Higher rates in US based on: Unemployment rate falling to 6.5% as long as inflation expectations 2 yrs out not above 2.5% and long run inflation expectations are well anchored. Fed Evans suggests 5.5% should be threshold. Source: Bloomberg, Scotiabank FX Strategy 7
THE FED: US INFLATIONARY PRESSURES TRENDING LOWER US INFLATION PCE Core (Y/Y) PCE Headline (Y/Y) Source: US Bureau of Economic Analysis, Bloomberg, Scotiabank FX Strategy DISINFLATION OPENS DOOR TO REMAIN LOOSER FOR LONGER Inflation opens door to QE for longer Inflation likely more important for interest rate than QE 8
NEAR-TERM CAD DRIVERS & OUTLOOK DOWNSIDE USDCAD FORECAST Q2 2013: 1.05 Q3 2013: 1.03 USDCAD NEAR-TERM UPSIDE RISK DRIVERS OF CAD Global growth outlook (US& China) Bank of Canada policy vs Fed policy Broad USD outlook Domestic fundamentals -Housing -Oil - Relative growth Flow: Investment, Triple A Global risk aversion / appetite IMPACT ON CAD Short-term Negative Neutral Negative Negative Negative Negative Negative Neutral Negative SUMMARY: NEUTRAL/NEG 9
MEDIUM-TERM CAD DRIVERS & OUTLOOK USDCAD FORECAST Q4 2013: 1.02 Q4 2014: 1.00 USDCAD MED-TERM RANGE BOUND DRIVERS OF CAD Global growth outlook (US& China) Bank of Canada policy vs Fed policy Broad USD outlook Domestic fundamentals -Housing -Oil - Relative growth Flow: Investment, Triple A Global risk aversion / appetite IMPACT ON CAD Medium-term Positive Neutral Negative Positive Neutral Positive Neutral to positive Neutral Positive SUMMARY: Positive / Neutral 10
THE NORTH AMERICAN ECONOMIC BACKDROPS ARE LINKED US & CANADIAN GDPs ARE LINKED Source: Bloomberg, Scotiabank FX Strategy US and Canadian GDP are linked. What is good for the US is good for Canada. GROWTH: INITIALLY NEGATIVE AS CANADA UNDERPERFORMS US ULTIMATELY POSITIVE AS US RECOVERY FLOWS INTO CANADA 11
THE CDN vs US ECONOMIC BACKDROPS HOUSING & EXPORTS 4 3 2 1 0 CANADIAN GROWTH CONTRIBUTION US GROWTH CONTRIBUTION 4 3 2 1 0-1 -1 2012 2013 2014 2012 2013 2014 Source: Scotiabank Consumption Business Investment Inventories Residential Net Exports Government Total GDP US GROWTH OUTLOOK: Consumption & business investment are drivers Residential expands Government contracts CDN GROWTH OUTLOOK: Consumption & business invest are drivers Residential contracts Net exports expand Government contracts 12
US GROWTH OUTLOOK THREE POSITIVE TRENDS HOUSING, CARS & ENERGY US HOUSING STARTS ARE RISING US VEHICLE SALES Source: Bloomberg, Scotiabank FX Strategy Source: Bloomberg, Scotiabank FX Strategy US CRUDE OIL PRODUCTION (barrels) US GROWTH: Improving housing and car market helps to offset some of weakness. Energy production likely to prove long-term positive for US economy. Source: Bloomberg, Scotiabank FX Strategy 13
CANADA: INFLATION CANADIAN INFLATION DISINFLATIONARY PRESSURES Core CPI y/y Headline CPI y/y INFLATIONARY PRESSURE IN CANADA TURNS DISINFLATIONARY Headline CPI falls outside of BoC range in 4 of last 6 releases BoC is an inflation targeting central bank 14
CAD NEUTRAL: BANK OF CANADA MONETARY POLICY OUTLOOK ONE-YEAR OIS MARKET SHIFTS: NO RATE HIKE PRICED IN 2013 At 1.0% market pricing in a 0% probability of an interest rate hike or cut over next 12-months Source: Scotiabank FX Strategy & Bloomberg Market prices in no interest rate hike or cut in Canada in 2013. BoC policy relative to the Fed is neutral to bullish CAD. CENTRAL BANK POLICY: NEUTRAL 15
CAD RISK: HOUSING Canadian housing market: anticipate a moderate cooling not a collapse Housing market supported by: interest rates, immigration, employment & commodity prices. -Interest rates: BoC on hold until 2015 - Immigration: no change in trend. - Employment: gains are slowing; but unemployment at 7.2% and trending lower. - Commodity: stabilization at current levels. CANADIAN HOUSE PRICE INDEX Prices cooling on government initiative. Differences between Canada & US: - CMHC (mortgage insurance) - Recourse loans - No tax deductions for mortgage interest. Source: Teranet & Scotiabank FX Strategy CANADIAN HOUSING NEGATIVE BUT TOO MUCH BAD NEWS IS PRICED IN 16
CAD: CURRENT ACCOUNT DEFICIT CANADA's CURRENT ACCOUNT DEFICIT 3 MERCHANDISE TRADE BALANCE SURPLUS 2 1 0-1 -2-3 -4 2000 2005 2010 2015 Source: Scotiabank FX Strategy & IMF CANADA s CURRENT ACCOUNT & TRADE BALANCES Canada is expected to make little headway on improving its current account deficit. Canada s merchandise trade balance shifts to surplus Supported by increasing exports of motor vehicles, parts and energy 17
CAD RISK: TRADE CANADA HAS LOW PERCENTAGE OF EM EXPORTS RELATIVE TO OTHER ADVANCED ECONOMIES 60 % % 50 CANADA HAS FALLING SHARE OF US IMPORTS (%) 22 21 40 30 20 10 0 Australia Japan US German UK Canada Source: Bank of Canada, Scotiabank FX Strategy 20 19 18 17 16 15 Q1 2000 Q1 2005 Q3 2012 Source: Bank of Canada, Scotiabank FX Strategy CANADA s TRADE RELIANCE ON US IS MAJOR RISK Canada has low share of EM market Canada has declining share of US market 18
CAD RISK: TRADE Source: Bank of Canada Canada is losing export share EM gaining share 19
CAD RISK: TRADE CANADIAN EXPORTS $ Source: Bloomberg Canada s exports fail to recover. For Canada s recovery to take hold; exports need to climb. 20
CAD RISK: TRADE CANADA s EXPORTS (as of Q4 12 -% of total) 20 19 15 14 13 10 5 9 9 6 6 5 5 4 3 8 - Energy products Cars & parts Metal & minerals Cdn exports (%) Comm services Consumer goods Forestry products Chem, plas & rubber M & E Farm, fishing,etc. Electronics Aircraft & other trans equip Other Source: Statistics Canada & Scotiabank FX Strategy Canadian exports are not balanced by geography or product Energy makes up 20% of total Canadian exports Cars and parts and forestry make up 20% of exports CANADIAN TRADE: OIL IS RISK; FORESTRY, AUTOS AND SERVICES ARE POSITIVE 21
CAD RISK: US DOMESTIC OIL PRODUCTION US OIL PRODUCTION FORECAST 17 Quad Btu 16 15 14 13 12 11 10 Source: EIA 2010 2015 2020 WHAT DOES US DOMESTIC PRODUCTION MEAN FOR CANADIAN OIL EXPORTS? US moves from importing 20% of energy needs net exporter by 2035. Energy demand: China s increases 60% by 2035; India s rises by 50%; OECD rises by just 3%. 22
CAD RISK: US DOMESTIC OIL PRODUCTION US DOMESTIC PRODUCTION DOES NOT EQUAL LOWER CDN OIL EXPORTS US OIL IMPORTS ARE FALLING BUT NOT FROM CANADA Mn of barrels Total US oil imports US imports from Canada Source: Scotiabank FX Strategy, Bloomberg, US Department of Energy 23
CAD RISK: US DOMESTIC OIL PRODUCTION VALUE OF CANADIAN OIL EXPORTS (USD) 140 120 IMF forecast 100 80 60 40 20 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Source: Scotibank FX Strategy & IMF CANADA S OIL EXPORTS Have remained strong IMF expects upward trend Very difficult to forecast however so far market more negative than reality 24
CAD RISK: NORTH AMERICAN OIL PRICING OIL PRICE SPREADS NARROW & STABILIZE Brent WTI Western Cdn Select Spread between Brent and Western Canadian Select Source: Scotiabank FX Strategy & Bloomberg The Brent Western Cdn Select spread has narrowed from $65 to $27 since December. This is positive for Canada and CAD. OIL: PRICING IMPROVING BUT US DOMESTIC PRODUCTION IS RISK 25
CAD: DEBT & FISCAL BURDEN CANADA: NET DEBT IS LOW CANADA: FISCAL DEFICIT IS IMPROVING 50 40 as % of GDP Forecast 2 as % of GDP Forecast 30 0 20-2 10-4 0 2000 2005 2010 2015 Source: IMF, Scotiabank FX Strategy -6 2000 2005 2010 2015 CANADA S BALANCES ARE THE ENVY OF MANY Net debt is low and stable Fiscal deficit is a concern, but narrowing Not as positive as it was in mid-2000s Positive on relative metric 26
CAD NEGATIVE: FLOWS - US EQUITY OUTPERFORMANCE US equities are outperformed Canadian equities by significant margin. Driving US equity appeal. 27
CAD POSITIVE: FLOWS -FOREIGN Source: Bloomberg, Scotiabank FX Strategy INTERNATIONAL SECURITIES TRANSACTIONS Fading appetite for Canadian based assets? 28
CAD POSITIVE: FLOWS -THE VALUE IN TRIPLE AAA Total Allocated - $ (bn) change in FX reserves 175 125 75 25 (25) (75) Other USD (125) Source: IMF, Scotiabank FX Strategy 2003 2006 2009 2012 FX reserves allocated to other currencies like CAD and AUD climb. FX reserve buying of other currencies almost equals new buying of USD. 29
CAD NEUTRAL: SENTIMENT IS BEARISH BUT HAS SWUNG TOO FAR 150 CAD: NET POSITIONING '000s of contracts 100 50 0 long short -50 Net Position -100 May 12 Jul 12 Sep 12 Nov 12 Jan 13 Mar 13 Source: Scotiabank FX Strategy, Bloomberg & CFTC SENTIMENT: TOO BEARISH FOR A BALANCED OUTLOOK FOR CAD 30
CAD DRIVERS & OUTLOOK USDCAD FORECAST Q4 2013: 1.02 Q4 2014: 1.00 Trend: USDCAD RANGEBOUND CENTRAL BANK POLICY: FED TO TAPER DRIVING USD STRENGTH BOC MIGHT ABANDON HAWKISH BIAS BUT REMEMBER FINANCIAL STABILITY RISKS GROWTH OUTLOOK US ECONOMY SET TO OUTPERFROM IN MEDIUM-TERM WHAT IS GOOD FOR US IS GOOD FOR CANADA CHINA EXPECT TO GROW CLOSE TO 8% CANADIAN ECONOMIC FUNDAMENTALS LOW INFLATION & EMPLOYMENT & HOUSING ARE CONCERNS COMMODITIES MARKET TOO PESIMISTIC ON IMPACT OF US DOMESTIC PRODUCTION ON CANADA CURRENT ACCOUNT & DEBT PROFILE: LONG-TERM STORIES UNLIKELY TO DRIVE NEAR-TERM FLOWS: SHIFTING TO LESS POSITIVE INFLUENCE SENTIMENT: NEGATIVE CAD 31
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