Improved Outlook for Canadian Covered Bonds May Support Canadian Dollar in the New Year

Investor service Moody’s has turned positive on Canadian Covered Bonds in 2016 as a result of an improved 0utlook for the economy, which could have positive knock-on effects for the CAD. .

“Canadian ABS, RMBS and covered bonds will continue to be of solid credit quality in 2016, with slow but steady economic growth supporting our positive outlook for all these securitization types." According to Moodys' report. 

Covered Bonds are a form of Asset Backed Security which are made up of smaller, normally private consumer loans, for car financing or other capital goods.

Moodys' increased confidence in the ability of debtors to meet monthly repayments and avoid delinquency were a rare thumbs up for the Canadian economy which has been reeling from a string of negative data releases recently, including a widening trade deficit in November and an unemployment rate still showing small rises.

“Issuers' strong credit ratings, along with well-seasoned collateral pools, will ensure continued good performance from Canadian credit card ABS next year. Delinquency and charge-off rates will remain low, while monthly payment rates will stay high.” Continued the report. 

HSBC bullish CAD in 2016 with contrarian call

Moody’s positive outlook for the economy could provide ‘a ray of sunshine’ for the Canadian Dollar as it supports the views of currency strategists at HSBC who see the Canadian Dollar rising in 2016, forecasting USD/CAD down from 1.35 to 1.25.

The key factor in CAD’s revival, according to HSBC, will be the “unorthodox fiscal policy” of the new Canadian government, which is introducing a

counter-cyclical fiscal boost.

“With both monetary and currency stimulus hitting exhaustion, a fresh approach is needed. Canada's new government, with its plan for a counter-cyclical fiscal boost, may be the test bed. The CAD will be the likely beneficiary, especially given the currency's growing sensitivity to interest rate differentials.” Say HSBC. 

In an article in the Globe and Mail, which outlines the new government’s fiscal policy, this “unorthodox” fiscal policy is explained:

“The new Liberal government is vowing to spend billions on infrastructure projects to help kick-start the economy, and will go into deficit for at least two years to pay for it. That could take much of the pressure off the Bank of Canada to have to resort to negative interest rates and other unconventional policies.”

BOC cautiously confident

Whilst much has been written about how dovish recent BOC commentary has been, many observers have down-played comments which point to a quiet confidence in steady growth in 2016, in line with the view held by Moody’s.

At December’s rate meeting the BOC stood pat despite fears it would have to ease further on the back of more declines in oil and rising unemployment.

Nevertheless this was overshadowed by reporting on a recent speech by Governor Poloz in where he outlined a set of “unconventional” monetary instruments for use in the event of an economic shock, including a surprise -0.5% negative deposit rate.

Whilst this led some investors to fear the BOC might be considering their implementation, Governor Poloz tried to assure investors they were not:

“We don’t need unconventional policies now and we don’t expect to use them. However, it is prudent to be prepared for every eventuality…”

Indeed Poloz was broadly positive for the Canadian economy, echoing Moody’s upbeat assessment, saying:

“The overall economy is growing again, even as the resource sector contends with lower prices, because the non-resource sectors of the economy are gathering momentum.”

BOC sees the recovery returning to pre-crisis levels by “mid-2017”, on the back of stable growth.

With recent GDP figures showing a higher-than-expected 0.6% rise in Q3 from -0.1% in Q2, factors offsetting CAD weakness may be starting to gather.