Canadian dollar to hold near current levels for rest of 2013 and return to parity in late 2014: CIBC

Canadian dollar to hold near current levels for rest of 2013 and return to 
parity in late 2014: CIBC 
Loonie to benefit from better U.S. and global growth next year 
TORONTO, July 8, 2013 /CNW/ - The Canadian dollar will not suffer the fate of 
the Australia currency and will hold near current levels through 2013 while 
seeing a rebound to parity by the end of next year, finds a new report from 
CIBC World Markets Inc. 
"As we expected, the Canadian dollar has been a casualty of disappointing 
global growth this year, moving even earlier than we forecast to our target of 
five cents weaker than parity," says Avery Shenfeld, Chief Economist at CIBC. 
"But that now has some momentum-style forecasters piling on even more damage 
ahead. Instead, while normal volatility will no doubt see days with the 
Canadian dollar a cent or two weaker than today's levels, we view the bout of 
Canadian dollar softness this year as an opportunity to buy it ahead of a 
likely appreciation in 2014." 
Unlike a number of forecasters, Mr. Shenfeld does not believe the loonie will 
suffer the same drop as the Australian dollar. "The deeper dive suffered by 
the Australian dollar, from US$1.06 in mid-January to 0.91 today, is oft cited 
as foretelling the Canadian currency's fate, as the two are seen as twins by 
many traders. 
"Analogies to the Australian dollar's steeper setback are overdone, as the 
currencies are more like distant cousins than twins in terms of the economic 
fundamentals. While both are in the so-called "dollar bloc" (an empty phrase 
in our view based only on the name of the currency), and both countries are 
developed, commodity exporting nations with historical ties to the UK, on 
other key fundamentals, the gaps are as wide as their geographic separation." 
In the report, Mr. Shenfeld and CIBC Economist Andrew Grantham write that it's 
been many years since the two countries were in the same phases of the 
business cycle. They note that while Canada faired better than most industrial 
nations, it still experienced a serious recession in 2008/9 - something 
Australia managed to escape. As a result, the central banks in the two 
countries have been on very different courses. When Canada's interest rates 
were pushed to record lows, Australian rates were rising to combat 
inflationary pressures. 
So while both currencies were hit this year by the implications of soft global 
growth on commodity prices, Australia was further hit by the decision by its 
central bank to cut interest rates in response to weaker Australian growth. 
That's a story that's not in the cards for Canada given the much lower 
starting point for central bank rates, and the Bank of Canada's reluctance to 
add fuel again to household borrowing. 
But they also point out that the export focus of Canada is much more varied 
than that of Australia. Australia's top six exports are all commodities and 
resources account for around three-quarters of all outbound shipments. Iron 
ore and coal are the countries leading exports. In Canada, resources still 
make up less than half of exports, with manufactured products still hanging on 
to a major role. The country's top exports are oil, vehicles/parts and 
"While resource prices are correlated given their link to the global business 
cycle, price trends do diverge," notes Mr. Shenfeld. "Disappointing growth in 
China, and a shift in its mix towards less resource-using sectors like 
services, will continue to play much more negatively for Australia's export 
prices and related capital spending. 
"China accounts for a whopping two-thirds of global iron ore 
imports—Australia's key export. In contrast, China's import share in oil, 
Canada's export heavyweight, remains much smaller. The result of Australia's 
greater commodities reliance, and specifically to goods tied to Chinese 
demand, is that China's boom and slowdown have led to a much higher spike and 
deeper tumble for Aussie export prices." 
The report notes that while Canada's oil reliance brings its own 
vulnerabilities, the CIBC economists expect crude oil to average $98 per 
barrel next year, helped by improving global growth, even if Mideast politics 
settle down a bit. "One would have to be a huge bear on prices for oil and 
Canadian manufactured goods to have Canada face as much damage to its terms of 
trade as that suffered by Australia since mid-2012," adds Mr. Shenfeld. "The 
only equivalent for Canada in recent decades was in fact the Great Recession, 
which included a dive in oil prices to less than $40 per barrel." 
The CIBC economists believe Canada faces a potentially more favourable 
external environment in the coming year, given its greater tie to the U.S. 
With a lower drag from fiscal policy and further improvement in homebuilding, 
they think the U.S. economy could see a noticeable acceleration next year and 
forecast growth of 3.3 per cent vs 1.8 per cent in 2013. In contrast, they 
expect only a moderate acceleration in China—Australia's key export driver. 
"The Canadian dollar should be a beneficiary of better U.S. and global growth 
next year," says Mr. Shenfeld. "Talk of an imminent tapering of QE by the Fed 
appears overdone, and the tap will not be completely turned off until the U.S. 
economy is strong enough. Such strength would only be a plus for. Look for the 
Canadian dollar to stabilize near current levels in the last half of this 
year, a buying opportunity ahead of a trade-driven appreciation back to parity 
in 2014." 
The complete CIBC World Markets report is available at: 
CIBC's wholesale banking business provides a range of integrated credit and 
capital markets products, and investment banking to clients in key financial 
markets in North America and around the world. We provide innovative capital 
solutions and advisory expertise across a wide range of industries as well as 
top-ranked research for our corporate, government and institutional clients. 
Avery Shenfeld, Chief Economist, at 416-594-7356,; or 
Kevin Dove, Communications and Public Affairs at 
SOURCE: CIBC World Markets 
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CO: Canadian Imperial Bank of Commerce
ST: Ontario
-0- Jul/08/2013 11:30 GMT
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