Policymakers are sticking to their hope for a 'broadening recovery'

Toronto Dominion Bank on Canada economy ,“dead money” and Loonie perspective

According to Statistics Canada, businesses were sitting on $626 billion of unused cash in the last quarter of 2013, a jump of 6% in the previous quarter. The International Monetary Fund has also warned that Canadian companies are accumulating "dead money" faster than any other G7 nation. At the same time the US government has announced economy added 321,000 jobs in November – the best figure in almost three years. Taking this into account, is now the best time to make this “dead money” work?

Obviously, corporations have been quite cautious in terms of deploying cash; hence, it would be worth saying that it is not a unique agenda. Statistical data may show that these circumstances are somewhat more common in Canada than elsewhere. However, I believe it reflects a general sense of uncertainty. If you pay attention to the investment activity and the commodity complex, which is likely to be curtailed, given the fact that the energy prices have pushed lower – the hesitation on the part of Canadian corporate culture is rather understandable.

The situation does depend on a particular part of the country, as currently concerns the Western part of Canada, given that it is closely tied to commodity prices. Definitely, there is an opportunity for Eastern companies which are impacted by a robust US economy. Moreover, the manufacturing sector will try to take advantage provided by very low interest rates to extend their capital investment project.

Bank of Canada acknowledges that low oil prices “will weigh” on the economy, but policymakers are sticking to their hope for a “broadening recovery.” However, Governor Poloz mentioned that they see signs of overbuilding in new construction with a run-up in price, which eventually could lead to a housing bubble in Canada. Do you believe this bubble to happen in the foreseeable future and is this a more serious thread indeed than the falling oil prices?

Certainly we are monitoring the housing market conditions quite carefully. However, needless to say, I think the risk of a bubble still remains fairly moderate, since interest rates are also quite low. That limits the extend of how far housing market might have to slow down. Whereas, as we look at it over the next couple of years, it is one area in Canada that has received a lot of investment activities. As interest rates are expected to gradually move a bit higher, it will certainly start to slow some of the strength that we have seen.

To sum up, I would mention that concern for the overall economy over the next 6 months is clearly focused on the price of oil. However, as we start look further in to the future, a larger medium-term concern is how the conditions of housing market evolve, which will be quite closely tied to the interest rates.

What events will determine the Loonie in the Q1 of 2015?

Alongside the oil price factor, we will also look on the relative development of the US economy versus Canada and the relative performance of the interest rates as well. Our sense is that a lot of momentum is being built-in the Greenback and US economy will be stronger than those in Canada. Hence, our expectation for the currency is to witness further weakness just as oil prices will remain subdued and the growth differential will continue to favor the USD.

What are your forecasts for USD/CAD, AUD/CAD and CAD/JPY by the end of 2014 and Q1 of 2015?

We expect the USD/CAD to be at 1.14 for 2014 and 1.15 for the end of Q1 of 2015. Talking about the CAD/JPY, we anticipate 101 for the end of this year and 104 for Q1 of the upcoming year, and as concerns the AUD/CAD, we see the pair to end the year at 1.02 and a target of 1.01 for Q1 of 2015.