CAD: An underlying slowdown – RBS

Brian Daingerfield, Research Analyst at RBS, suggests that in Canada, the currency has shown resilience despite the drop in oil prices.

Key Quotes

“The Bank of Canada, unlike its colleagues in other commodity exporter central banks, is relatively close to the lower bound on interest rates and has high exposure to the growing US consumer. But the renewed decline in oil prices nevertheless exposes the economy to additional downside risks, including a further decline in the already-disappointing pace of business investment. The 2Q Business Outlook Survey showed business confidence remains subdued, and the Bank of Canada listed sluggish business investment first in its list of risks to the inflation outlook.

The recent benchmark revisions to the US GDP report revealed that wage and salary growth in the first quarter of 2016 was significantly lower than originally reported. Wage and salary income in the economy actually contracted 0.5% q/q annualized vs. an initial estimate of +4.6%. Business investment in the US has underwhelmed and lower income growth in the economy may mean that consumer demand growth is more restrained in the second half of 2016. A more muted US consumer outlook, if realized, could reduce the expected boost to growth from Canadian exports to the US.

The Vancouver, BC government just this week introduced a new tax on residential property purchases by foreign nationals. The Bank of Canada has repeatedly noted the risks surrounding the housing market are “elevated and rising, particularly in the Vancouver and Toronto area.” That housing risk, along with a very strong start to the year for Canadian retail activity, may be limiting the Bank’s willingness to cut their policy rate further, as it may encourage a buildup in household credit and the housing market. An expansion of macroprudential or fiscal policies aimed at cooling the housing market could both reduce foreign investor inflow into the Canadian housing market and provide scope to lower the policy rate.”