The Canadian economy continues to show uncanny resilience. Government assistance to households remains generous and the bounceback in employment is more impressive in Canada than in the US. This outperformance has led to a widening of short-rate spreads to the US and helped support the loonie. We have a 12-month target of USD/CAD at 1.28 but a cautious view for the period up to the US election, as per the National Bank of Canada.
Key quotes
“The Canadian economy continues to show uncanny resilience. The Labour Force Survey reports a 378,000 rise of employment in September, more than double the consensus expectation of 150,000. With the participation rate up 0.4 percentage points, to 65%, this gain reduced the unemployment rate from 10.2% to a still-high 9.0%. Overall, the bounceback in employment is more impressive in Canada than in the US. This outperformance has resulted in a significant widening of Canada-US interest-rate spreads and helped support the CAD.”
“The Canadian recovery is entering a new phase: most of the ‘easy’ employment gains (i.e. employees returning to their old jobs) are now probably behind us. The reintroduction of social-distancing measures by some provincial governments is also likely to weigh on employment. Fortunately, households continue to benefit from generous support from Ottawa and the provinces.”
“Absent another round of fiscal stimulus in the US, we continue to expect the Canadian dollar to soften against the greenback in the run-up to the presidential election. Beyond that point, we see the USD falling to 1.28 CAD as the Fed’s reflation policy gains traction with more support from Washington.”
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