Why Goldman Sachs recommends shorting the Canadian dollar

Take a look at today's current account report from Statistics Canada to see why Goldman Sachs Group Inc. recommends shorting the loonie.

... the Wall Street giant forecasts the Canadian dollar will sink to 88 cents U.S. One of its reasons is that Canada has been running a current account deficit.

There are other reasons, but that one tops the list.

“Since the global financial crisis, significant external imbalances have built up in the Canadian economy,” Goldman said.

“In 2008, the current account balance fell from a surplus of 1 per cent of GDP to a deficit of 3 per cent – and it has remained stable at this level since then,” the bank said in its report.

“The main reason for this has been a decline in manufacturing exports, which fell by about 30 per cent during the crisis.”

Over the past several quarters, Goldman added, money flowing into Canada has slowed markedly, and interest rates are low, and expected to stay there.

“It is also important to highlight that the Canadian dollar remains clearly overvalued on our … fair value model,” the bank said.

“Combined with the weak current account position, there are therefore good fundamental reasons for a weaker CAD,” it added...

"We would need to see an improvement in Canada's resource product prices and a measured pick-up on global growth in order to see the current account deficit narrow ahead."

The deficit in the trade of products narrowed slightly to $2.2-billion as exports rose more than imports. While a trade surplus with the United States widened on energy and auto exports, the deficit with other countries similarly fattened as exports fell.

Where services are concerned, the deficit narrowed by some $300-million to $5.9-billion, partly because tourists and other travellers spent more in Canada...

So what’s the outlook?

“Canada’s current account gap of just over 3 per cent of GDP is manageable, but continues to suggest the Canadian dollar is overvalued,” said senior economist Robert Kavcic of BMO Nesbitt Burns.

“A stronger U.S. economy and softer loonie should help narrow the gap somewhat in 2014.”

This has been exerpted from the 28 November 2013 article by the Globe and Mail, and is availalble at: http://www.theglobeandmail.com/report-on-business/top-business-stories/why-goldman-sachs-recommends-shorting-the-canadian-dollar/article15648571/.