Francesc Riverola,
Forex - U.S. Dollar: Cyclical and Structural Forces in Tug of War by National Bank of Canada
* Standard & Poor’s downgrading of its credit rating outlook on the United Kingdom from stable to negative rattled the exchange markets and caused the fiscal sustainability of the principal advanced economies to be reassessed.
* Normally, the desynchronization of U.S. and European monetary policies will push the greenback to gain at least 10% on the euro over a period of one year. In the next 12 to 18 months, the positive cyclical forces of the greenback should dominate the negative structural forces related to the worsening of the U.S. budget deficit.
* For the first time in history, commodity prices are literally miles ahead of the actual state of the real economy. This, in turn, is driving up the cyclical currencies, including the Canadian dollar.
* At present, the loonie exceeds its long-term equilibrium value by nearly 10%. However, unlike in October, the price of oil today is less than $70 a barrel and Canadian export levels are depressed. As the Bank of Canada cannot modify its position on quantitative easing, the loonie will depreciate only if the greenback appreciates across the board. In the end, if our forecast regarding the euro proves right, the loonie should come down a few cents from its current level.
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