J.C. Rathbone Associates Blog The direction of the Canadian dollar

In recent weeks, a number of forecasters have provided their thoughts on the direction for the Canadian dollar, that is, continued weakness. These projections cite continued deterioration in oil prices and given their view that Canada is a "petro-economy", a resulting decline in GDP. The correlation between the currency and WTI is indicative of that view.While these forecasters call for a 25 bp cut in interest rates by the Bank of Canada, they may be overlooking the stimulative impact on aggregate demand due to the dramatic decline in the Canadian dollar since early 2015.The Bank of Canada website (http://www.bankofcanada.ca/rates/indicators/key-variables/monetary-condi...) provides an outline of the Monetary Conditions Index (MCI). The MCI attempts to provide a measure of the degree of easing (or tightening) in monetary conditions from changes in the Canadian dollar and short term interest rates. More specifically, a 3% decline in the Canadian dollar has the same stimulative easing effect as a 100 bp decline in short term interest rates. So one could make the argument that the Bank of Canada has already achieved significant monetary easing due to the 18% decline in the currency through 2015.While its difficult to trade against market momentum, and things may very well get worse before they get better, a case can be made for the Bloomberg consensus of a 1.3300 CAD by the end of 2016. The Canadian economy should improve due to 1) the stimulative effect of the new Liberal government's commitment to infrastructure spending 2) continued growth in the US economy (Canada's largest trading partner) and 3) the monetary stimulus from the weak Canadian dollar.We plan to keep a watchful eye on the direction of the Canadian dollar as we move rapidly into 2016, but only time will tell how the Canadian economy will fare this year.