Trade Corner

Canadian Dollar (CAD)

by Macro D

In the Midweek Update of October 23, we began to monitor the Canadian situation. Let's start from the beginning of November, precisely from November 4, 2024. In those days, a fast and persistent decrease in interest rates was necessary for the Canadian economy. Even though the monetary policy committee ran like a rocket on the path of reducing rates, everything told me that the numbers primarily justified every choice. I had no trades for or against the Canadian dollar; I was on standby in the wake, traced by Governor Tiff Macklem. But what was this feeling that saw me following this path of cutting rates based on? If there is a macro reasoning that at least quarterly returns to my mind, this reasoning has to do with mortgages (and the consequent risk related to their renewal). One figure above all. In 2020, home sales grew by as much as 40% while the BoC was cutting the interest rate to almost zero, and in the last two years, many home buyers have preferred to opt for short mortgage terms, lulled by the hope that the BoC will continue to cut rates. At the same time, since 2020, both house prices and Canadian wages have grown in Canada (growth of over 30%). In short, it is a framework in which buyers and sellers are at ease. But is all that glitter gold? The other side of the coin is that the recovery of the real estate market will lead to a new cycle of debt accumulation. The BoC will have to be careful to recognize the impulse to spend and not abandon its currency to its fate, which, at this rate, would cause it to lose its purchasing power relative to foreign markets.

So, in early November, I had the impression that Canada was perfectly adapted to the rate path that it had decided in its October monetary policy meeting when the BoC cut its benchmark rate by 50 bps to 3.75%; it was the fourth consecutive cut for a total of 125 bps. In the meantime, Trump returned, and I began to think that the trade earthquake that would have arisen from his appointment would undoubtedly have affected European and Asian markets. But what about Canada? Canada can leverage the USMCA agreement (which sees Canada, the US, and Mexico among its signatories) signed during Donald's first term, who, if we look closely at his statements, has never indulged in one of his classic rants against Canada.

What now? Let’s dig deeper.