Domestic economic data reports have been wretched of late, yet the value of the Canadian dollar has stabilized relative to the greenback. The primary suspect behind this apparent economic riddle is global growth expectations which are not only supporting the loonie, but allowing for a partial rebound in commodity prices.
The first chart below highlights the close connection between consensus global growth expectations for 2015 and the value of the domestic currency. The black line shows the evolution of economists' forecasts for global gross domestic product growth for 2015.
SOURCE: Scott Barlow/Bloomberg
Two years ago, the average guesstimate for world economic expansion was well over three per cent. But as China's outlook dimmed and European economies faced significant deflationary hurdles, expectations were steadily ratcheted down to a low of 2.7 per cent earlier this year. The Canadian dollar fell along with economic optimism.
Fluctuations in the value of the loonie are frequently caused by commodity price movements, giving rise to the term "petroloonie." In addition, Bank of Montreal currency strategists have concluded that the copper price is the best leading indicator for the Canadian to U.S. dollar exchange rate.
With this in mind, the second chart goes a long way in explaining the recent stability in the value of domestic currency. The copper price has bottomed, at least temporarily, along with global growth expectations.
SOURCE: Scott Barlow/Bloomberg
It's apparent that the changing global growth forecast is currently driving many of the most important asset values in Canada, notably the currency and commodity prices. The recent rise in economic optimism for this year is slight – from 2.7 to 2.75 – but it has been enough to halt the decline in the commodity prices that influence the Canadian dollar.
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