Following the release of the US GDP data, the USD/CAD Strength Following BoC appeared exhausted ahead of US GDP data. The economic growth had been on a high note for the past several quarters, and all the signs suggested that the same was likely to continue. Although the strength following the USD/CAD will undoubtedly follow the USD/CAD Strength Following BoC ahead of US GDP data in the coming months, however, there are a few surprises in store.
A weakening of the dollar strength following the USD/CAD appears to have limited the scope for further appreciation. Consequently, the currency is expected to drift back towards its current level before heading for a slight loss. What does this mean for investors?
The dollar strength following the USD/CAD may be restricted to short-term gains. The prevailing perception is that this will be a strong effect due to the fiscal austerity adopted by many governments over the past two years. For example, many of the European economies have imposed stiff fiscal budgets and with them came fiscal deficits. Given the fiscal mandates that the United States has, the dollar strength following the USD/CAD is unlikely to hold, and at the current pace, may be eroded even further.
The dollar strength following the USD/CAD appears to be closely linked to the credit market’s reaction to the ongoing economic crisis. If the US economy has been able to avoid a recession, then the credit market has been able to anticipate any adverse outcome. The currency strength following the USD/CAD may be a consequence of the stronger equity market reactions in response to the weak economic data.
The equity market has reacted to the increased market volatility with greater buying during the recovery period, and less buying during recessions. Consequently, the currency strength following the USD/CAD is not only tied to the USD/CAD Strength Following BoC. The equity market has also found its legs and is likely to continue buying.
The best of all possibilities for investors is that the strong USD/CAD following the USD/CAD could persist well into the future. That would mean a strong US economy that is likely to go on purchasing goods and services around the world in the future. Additionally, the exchange rate will not experience an appreciable depreciation during the recovery period.
In spite of the currency strength following the USD/CAD, the future appreciation is going to be constrained by the fiscal policies of the US government. When the fiscal policy stances are unchanged for the next couple of years, the exchange rate is likely to have a relatively weak effect on the USD/CAD strength following BoC.
The fact that the value of the dollar has weakened against other major currencies is good news for the US economy, and investors should view it as a positive indicator of US economic recovery. It is also likely to result in more import and export stimulus. When the budget trajectories of the US government change, and more fiscal spending and tax cuts are announced, it will give an even better chance for the currency strength following the USD/CAD to improve.
The strength of the dollar is unlikely to remain robust for very long. This is not due to some form of fundamental weakness in the currency, but rather, because of the weakness of the US economy, and the continued fiscal austerity.
Since the weak euro is coming off the line, the USD/EUR is likely to look more attractive. Whether or not this is a sustained movement remains to be seen. Regardless, the dollar strength following the USD/CAD is now poised to increase in the coming months, and could eventually lead to a higher exchange rate in the event of more fiscal stimulus.
future strength Investors should expect to see the USD/CAD strengthen in the coming months. As the US economy continues to recover from the recent fiscal measures, and tax cuts, the USD/CAD Strength Following BoC is likely to improve as the USD remains strong.