Canadian Dollar and Interest Rates Myths and Realities about the 2005 Outlook

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Canadian Dollar and Interest RatesMyths and
Realities about the 2005 Outlook
T.J. MartaSenior Currency Strategisttj.marta_at_rbc
cm.com1 212 858 6077 November 2004
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Key Issues

• Global economic growth has moderated
• U.S. dollar remains in a structural decline
  but how will this unfold?
• Who are the winners and losers from a USD
  decline?
• Interest rate cycles are out of
  synchronisation
• Putting the Canadian dollars appreciation
  into perspective
• Drivers of CAD going forward

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G7 growth is moderating
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But Canadian economic surprises are rising and
U.S. disappointments are declining
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Deterioration in U.S. twin deficits still warrant
further depreciation in the U.S. dollar
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How much cheaper can the U.S. dollar become?
Which one are we talking about?
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Asian central bank purchases of Treasuries remain
strong
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Interest rate cycles are out of synchronisation
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Bond market sell-off has not ended and equity
currencies will outperform in 2005
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Putting the Canadian dollar rally into perspective
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Canadian dollar rally against greenback is
extremely overdone
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Canadian economy is still tied to the U.S.
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Interest rate carry on Canadian dollar is likely
to stabilise
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Bank of Canada estimates that the output gap will
close by mid-2006
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Canadas inflation outlook is benign
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Yield spreads are unlikely to widen much further
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Canadas basic balance is in surplus
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Trade balance is likely to suffer
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Foreign direct investment into Canada had
accelerated watch China?
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Portfolio flows into Canada are picking up
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RBC Currency Forecasts
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RBC Currency Forecasts CAD Crosses
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RBCs Global Foreign Exchange Strategists
LONDON Monica Fan, Global Head of Currency
Strategy. Prior to RBC, Monica was a Principal
and Senior G10 currency and interest rate
strategist at the Bank of America (London), a
senior economist at JP Morgan (Sydney and
Singapore) and UBS (Sydney). Prior to working in
the financial markets, Monica was a senior
economic adviser at the Australian Treasury and
the Australian Prime Minister's Department.
Monica has a Master of Applied Finance from the
Macquarie University and a Bachelor of Economics
(Honours) the University of Sydney. Adam Cole,
Senior Currency Strategist specialising in G10
markets. Prior to RBC, Adam was a senior currency
strategist at Credit Agricole Indosuez (London),
a senior global economist at HSBC (London), and
an economist in the U.K. Department of Trade and
Industry. Adam has a Master of Arts
(Econometrics) from the University of Essex and a
Bachelor of Science (Economics and Statistics)
from the University of Plymouth. Tania Kotsos,
Senior Emerging Markets Strategist specialising
in Central European and South African markets.
Prior to RBC, Tania was a Central European market
strategist at Brunswick Direct (London and
Stockholm), a global Emerging Markets equity
analyst at UBS (London) and Robert Flemings
(London). Tania has a Bachelor of Commerce and an
Honours degree in Economics from the University
of Natal. NEW YORK T.J. Marta, Senior Currency
Strategist specialising in fundamental modelling
of G10 currencies and analysing FX flows. Prior
to RBC, T.J. was a senior currency strategist at
Citigroup (New York) and was previously a
financial analyst at ATT. T.J. has an MBA
(Finance and Statistics) from the Leonard N.
Stern School of Finance at New York University
and a Bachelor of Science from Wharton,
University of Pennsylvania. TORONTO Jeremy
Friesen, Senior Currency Strategist specialising
in the fundamental and quantitative analysis of
the Canadian dollar. Prior to RBC, Jeremy was a
macroeconomist in the Bank of Canadas Research
Department (Current Analysis Division) where he
specialised in the analysis of inflation. Jeremy
has a Master of Economics (International Trade)
from McGill University and a Bachelor of Business
from Trinity Western University. George Davis,
Chief Technical Analyst specialising in G10
currencies and interest rates. Georges previous
role sat RBC included being a senior spot
Canadian dollar and forwards trader and a foreign
exchange sales trader. George has a Bachelor of
Commerce (Honours) from Concordia University.
SYDNEY Greg Gibbs Senior Currency Strategist
specialising in Australia, New Zealand, Japan and
Emerging Asian markets. Prior to RBC, Greg was an
institutional FX salesperson at Westpac Bank (New
York) and Bankers Trust (in London and Sydney),
and had worked at the Reserve Bank of Australia
in foreign exchange rate policy, reserves
management and economic analysis. Greg has a
Bachelor of Economics (Honours) from the
Australian National University.
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Disclaimer

• Forecasts and data are as at November 2, 2004
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