USD/CAD Monthly Fundamental Forecast December 2012

Outlook and Recommendation

The USD/CAD ended the month at 0.9942. The Canadian economy faces a number of challenges, most notably the drag from increasing merchandise trade deficit. The growth in export volumes has stalled in response to slowing international demand, while the prices received for Western Canadian oil has declined. Canada’s export dependence on the U.S. for its oil and natural gas has been compromised by the lack of adequate pipeline capacity in the U.S. south that has resulted in a significant price discount for domestic crude, in addition to sharply higher U.S. gas production. The slumping value of Canadian exports has aggravated the merchandise trade imbalance and, combined with the ongoing deterioration in net tourism flows, has pushed the country’s current account into deficit of about $70 billion, or a 19-year high of almost 4% of nominal GDPBottom of Form

In the US, strengthening housing and export sectors are encouraging. Negotiations to address the ‘fiscal cliff’ will become the most important driver of economic growth in 2013. Fiscal drag is likely to prove a challenging force, but monetary policy, through Federal Reserve (Fed) balance sheet expansion, is expected to ease some of the financing cost burden. Fed rhetoric notes that a US economy gaining momentum does not equate to an imminent hike in policy interest rates, as there is a difference between how long the economy will be weak and how long monetary policy needs to be accommodative. As long as the Fed is engaging in asset purchases, the US dollar (USD) is expected to weaken against currencies like the Canadian and Australian dollars (CAD and AUD), whose central banks have failed to adopt aggressive alternative policy.

FxEmpire provides in-depth analysis for each currency and commodity we review. Fundamental analysis is provided in three components. We provide a detailed monthly analysis and forecast at the beginning of each month. Then we provide more recent analysis and information in our weekly reports and we provide daily updates and outlooks.

Central Bank – Bank of Canada

Date of next meeting or last meeting: December 4, 2012

Current Rate: 1.00%

Economic Highlights of the coming week that affect the American and Canadian Markets