The Goldman Sachs research team is doling out its top trade ideas in a Twelve Days of Christmas format. Today's idea? Short the Canadian dollar.
The researchers' pessimistic $1.14 (U.S.) – or, the Canadian dollar will be worth 88 U.S. cents – forecast hinges on the expectation that our trade deficit will broaden. The analysts note that 2008's sharp decline in manufacturing activity – manufacturing employment dropped 20 per cent and has not yet recovered – caused Canada's current account deficit to deteriorate from a surplus of one per cent of gross domestic product, to a deficit of three per cent.
Immediately after the financial crisis, Canada's economy easily attracted enough investors to address the shortfall. Global investors viewed the loonie as a safe haven relative to the U.S., where the health of the banking system remained in doubt. After an interest rate increase in 2010, Canadian debt issues attracted more foreign inflows and commodity multinationals vied for domestic resource properties such as Nexen and Progress Energy.
Goldman Sachs notes ominously, however, that "over the past few quarters, capital inflows have slowed rapidly." The pace of foreign investment has decreased, and emerging markets central banks are no longer adding to their holdings of Canadian dollars.
The weak outlook for the loonie is an outgrowth of Goldman's belief in a U.S. economic recovery for 2014. The acceleration of U.S. growth they expect – driven by consumer spending and corporate capital expenditure – would make it a draw more investment away from Canada.