Looks extremely bearish and a good long term risk/reward trade is in the works (via ETF or some other instrument).
Central Bank of Canada now between a rock and a hard place.
Regarding point (3) above, remember that CAD can appreciate even if BoC keeps rates low at which point BoC is out of options short of currency injections a la selling CAD on the open market.
Macro Justifications
Short term effects
Long term effects
Macro is all about which levers push more in one direction or the other.
- can the CAD appreciate in the event of an economic down turn? In turn giving BoC a free hand to stop protecting CAD and lower rates
- proximity affect of US inflation on Canada, although Canada experienced relatively no downturn during 2008 - 2009 US meltdown, so same could hold true now (i.e., US growth continues, Canada has economic crisis)
From this article: https://www.bloomberg.com/news/articles/2017-07-21/rba-s-aussie-dollar-rollercoaster-shows-dilemma-for-global-peers
"It takes just a 5 percent increase to inflict the same economic impact as a quarter-point hike in the Reserve Bank of Australia’s cash rate, according to Paul Bloxham, chief economist for Australia at HSBC Holdings Plc, who previously worked at the central bank."
Central Bank of Canada now between a rock and a hard place.
- allow CAD to continue appreciating and hurt exporters / dissuade foreign investment
- FED raises rates --> BoC follows pace in lockstep to protect CAD from falling too low (i.e., 60 cent range)
- or do they protect internal debt bubbles (housing, auto loans, consumer debt) by maintaining interest rates low at the expense of the CAD
Regarding point (3) above, remember that CAD can appreciate even if BoC keeps rates low at which point BoC is out of options short of currency injections a la selling CAD on the open market.
Macro Justifications
Short term effects
- appreciating CAD hurt exporters and foreign investors (i.e., those looking to invest in Canadian companies --> TSX)
Long term effects
- housing market unsustainable, on the verge of collapse
- among highest household debt per capita in the world (167% of adjusted household disposable income, Australia sits at 187%)
- debt of $2.029 trillion dollars on a workforce of 18.4 million out of 36 million population (51%) comes out to $110k debt per worker
- interest rate increases leading to mortgage debt distress (i.e., cannibalization of consumption in other sectors to make up mortgage payment shortfalls)
- NAFTA uncertainties?
Macro is all about which levers push more in one direction or the other.
- can the CAD appreciate in the event of an economic down turn? In turn giving BoC a free hand to stop protecting CAD and lower rates
- proximity affect of US inflation on Canada, although Canada experienced relatively no downturn during 2008 - 2009 US meltdown, so same could hold true now (i.e., US growth continues, Canada has economic crisis)
From this article: https://www.bloomberg.com/news/articles/2017-07-21/rba-s-aussie-dollar-rollercoaster-shows-dilemma-for-global-peers
"It takes just a 5 percent increase to inflict the same economic impact as a quarter-point hike in the Reserve Bank of Australia’s cash rate, according to Paul Bloxham, chief economist for Australia at HSBC Holdings Plc, who previously worked at the central bank."