| THE CANADIAN DOLLAR |
03 October 2006
We expect the CAD to depreciate in the medium term due to:
Our model suggest that the CAD is overvalued by 7% |
When the U.S. sneezes, the world catches a cold. But Canada (and Mexico) could catch pneumonia. Historic fact, and still a reality.
Responding to slowing demand from the U.S., Canadian export growth has been falling recently - Canada has a trade surplus with the US but deficit with the rest of the world. Of course, the sharp - nearly 45% - appreciation of the CAD since the beginning of 2002 has doubtless hit exports as well.
In addition, Canadian domestic demand and business investment are also softening as a result of interest rate hikes by the Bank of Canada since March 2005, which took their key rate from 2.5% to 4.25% by May 2006; it has remained steady since.
