• After some 20 months of downturn, there is at last a light on the horizon for the United States and confirmation that economic recovery is under way. With the end of the financial crisis near, we believe the financial markets will soon cease to trade the USD as a function of risk aversion or appetite and get back to basics, focusing on the cyclical backdrop to the U.S. economy.
  • The keystone of our currency scenario is an imminent return to job creation in the United States, which will force the financial markets to price in key-rate hikes by the Fed. Despite the colossal budget deficit, these cyclical forces should be enough to give the USD a second breath, at least over the short term.
  • The Canadian dollar’s recent appreciation seems to be slightly exaggerated as it is out of line with the price of certain key commodities exported by Canada. The portion in excess of fundamental factors is attributable to capital inflows from abroad driven by the loonie’s popularity at the international level.
  • The expected upward movement in the USD should drive the loonie down slightly, as the 2-year yield spread between Canada and the United States reverses for the first time since 2007. We expect the loonie to dip back just below the US$0.90 mark over the next two quarters.