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CAD: Setting the stage as 2015 draws to a close – RBC CM

FXStreet (Delhi) – Research Team at RBC Capital Markets, suggests that although disappointing to varying degrees, activity reports in Canada last week didn’t really serve to move the needle that much, continuing to point to Q3 growth in the range of 2.5% --consistent with RBC’s forecast and the Bank of Canada’s latest projections in its October MPR – though perhaps tilting risks to the downside.

Key Quotes

“However, oil prices pushed to the US$40/bbl level (WTI near-term futures), reinforcing our view of potential Canadian dollar weakness and GoC outperformance versus Treasuries as we enter 2016. Recall that the latest BoC forecasts were predicated on an assumption of US$45/bbl and that the BoC assumes that each US$10/bbl reduction in the assumed price of oil may widen the nation’s prospective output gap by about 1/4pp.”

“Our full year outlook for Canada is more constructive, seeing some support from a combination of: i) a lagged trade response to CAD weakness and a steady US economic expansion; ii) pending fiscal stimulus (even if likely skewed more to the second half of the year); and iii) an eventual rebound in the price of oil.”

“Amongst last week’s reports, one that caused some consternation was Canada’s international securities transaction data for September, which showed net selling of provincial securities by
foreigners on trailing 12-month basis of some C$11bn (the biggest net outflow in dollar terms in at least the past thirty years).”

“Foreigners are still showing considerable appetite for other Canadian credit product – corporate bonds and federal government crown corps – and aggregate foreign purchases of Canadian bonds (C$76bn) remain elevated, with net flows in Canadian dollar-denominated bonds responsible for about half that flow (C$38bn).”

“At the margin, these relatively steady inflows serve to keep Canadian yields lower than they would have otherwise been, though the magnitude is open to debate. A week ago, the Bank of Canada released an in-progress staff analytical paper on the impact of foreign flows on GoC yields, positing that C$150bn of foreign flows into GoC bonds from 2009-2012 lowered the GoC 10y yield by 100bp.”

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