CAD Outlook and Strategy

Published on - 6th April 2024

Navigating The CAD Landscape: Key Insights

In February, Canada’s Consumer Price Index (CPI) fell to 2.8%, below the expected 3.1%, signaling a return to the Bank of Canada’s (BOC) target range for inflation. Notably, costs notably dropped for cellular services (-26.5%) and Internet access services (-13.2%), contributing to the decline in CPI. Additionally, inflation cooled for food, thanks to eased grocery prices, while gasoline prices rebounded due to elevated global crude oil costs. Furthermore, rising bond yields lifted mortgage rates and shelter prices, indicating shifts in various sectors of the economy.

  • Monetary Policy Outlook and GDP Growth – The overnight rate is expected to remain unchanged at 5% in the upcoming April decision, but markets anticipate a rate cut by June. Despite the unexpected GDP growth of 0.4% in January and Q4 growth outpacing BOC’s forecast, domestic demand remains weak, driven primarily by exports and car sales. Business and housing investments have seen significant declines, while retail sales experienced fluctuations, showing a cautious outlook for early rate cuts amid expectations of a weak economy in the coming quarters.

  • Impact of Record-Breaking Immigration – Canada is experiencing record-breaking immigration, which presents challenges for the BOC’s fight against inflation. While population growth boosts GDP, it also raises housing costs and unemployment, contributing to December’s inflation rate. This influx of immigrants has led to a regression in GDP per capita and a decline in labor productivity, despite efforts to spur demand with potential rate cuts on the horizon.

  • Housing Market Trends – The Canadian housing market has shown signs of cooling, with a decrease in home sales and a decline in benchmark prices. Despite a slight increase in new listings, sales remain below the 10-year average, indicating a potential shift in market dynamics. The debate within the Bank of Canada regarding the duration of high rates suggests a cautious approach to address these trends and their potential impact on the broader economy.

  • Employment and Trade Dynamics – The unemployment rate rose to 5.8% in February, reflecting slow employment growth despite high immigration rates. However, Canada reported a trade surplus in January, contrasting with previous deficits, driven by decreases in both exports and imports. The current account deficit also shrank in Q4 2023, exceeding forecasts, while Foreign Direct Investment increased during the same period.

  • Global Oil Market Influence – Recent developments in the global oil market, including output cuts by OPEC+ and increased demand due to geopolitical tensions, have led to a rise in oil prices. As a significant oil exporter, Canada stands to benefit from this trend, which could positively impact its trade account. However, the overall economy faces risks of slow growth and weakening domestic demand, with implications for monetary policy and currency exchange rates.

  • Outlook – USDCAD is likely to be stable in short term with likely depreciation towards 1.3900 in medium term​. CADINR likely range 61.0-62.0 in short term with bias towards 61.00 and in medium term likely range 61.0 to 63.00 with bias for 63.00

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