Canadian Dollar Forecast July 2016
Foreign Exchange Outlook
July 2016
Canadian Economic Update
On June 24th, 2016 the United Kingdom had voted to leave the European Union. This uncertainty and resultant risk caused stock markets to drop, safe haven currencies such as the US dollar to appreciate, and bond yields to reach record lows. Interest rate increases for both Canada and the US have been ostensibly pushed further into the future. An event like Brexit is expected to have long-term effects on the FX space, including the CAD, USD, EURO, and British Pound. Such a decision has a large scale impact on the world economy and international trade so as more information disperses; drastic changes and decisions can impact the value of foreign currency. As there is less information available on global decisions, such as the perceived benefits and costs, there is more risk and a lack of comfort exposed for the financial community causing fleet from and less demand for the exposed currency, as in this case is the British Pound, and flight to a safe haven such as the US dollar, thereby increasing the demand for US Dollars.
Impact on the Canadian Economy
As there was a higher demand for US dollars after the Brexit decision, the value of the Canadian dollar had fallen. The markets have continued to experience elevated volatility over this period. Furthermore, the Alberta wildfires has continued to cause a fall in the supply of oil due to lower oil production and reduced distribution. Canada has also seen a decline in real Gross Domestic Product (GDP). However, there is still recovery and rebuilding happening for oil production and investments in infrastructure in Canada. Real GDP is expected to rise by 1.3% in 2016 in Canada. After Brexit, the Canadian Equity market dropped 3.2% with investors going to government bonds to manage risk. It is expected that the Canadian Dollar will modestly underperform the US dollar in the near term as funds flow to a larger and more liquid currency – the US Dollar. However, it is expected that the Canadian dollar will recover in 2017 as more data becomes available and oil prices recover.
Real estate sales and values continue strengthen in Canada. Toronto and Vancouver real estate prices continue to remain extremely strong, with downward pressure in oil-producing economies. Affordability in real estate is divided within the Canadian market and is likely to remain. With increased housing market activity, interest rates have remained low and household debt is high. Government policies addressing these risks are under review with the Finance Minister of Canada, considering policies to reduce such risks, including household debt.
Impact on the US Economy
The increase in volatility from Brexit in the financial markets resulted in concerns about global economic growth. However, GDP in the United States is still expected to grow by 2% in 2016. The US economy will face downward pressure in business investment and exports due to the Brexit decision. The stronger US Dollar, slower economic growth, and lower trade flow will slow US exports. In order to mitigate such risks, there will be higher dependence on increases in consumer spending, housing, and fiscal policy. With the low level of interest rates and good labour market conditions, it is expected that these risks will be temporary and the economy will grow at a higher pace in the future quarter. After the Brexit events, the British Pound had dropped by 10% to its lowest level since 1985. The Canadian Dollar fell 2.5% against the US Dollar.
Canadian Dollar Forecast July 2016
The Canadian dollar will feel some pressure due to a lackluster Canadian economy and commodity prices. There is not much upside to the Canadian dollar in the short term until the Canadian economy starts to outperform. The US dollar has a few catalysts, one of which is the flight to safety due to brexit. The second is the strong US economy which could push the FED to raise rates sooner rather than later, while the Bank of Canada likely does nothing. We see the Canadian dollar rangebound between 1.26 and 1.31 in the short term with a bias towards US dollar upside in the short term. Rising oil prices could save the loonie as its sole hope in the short term.
Forecast Table
Bank |
2016 – Quarter 4 (USD/CAD) |
2017 – Quarter 4 (USD/CAD) |
Scotiabank |
1.30 |
1.25 |
Royal Bank of Canada |
1.33 |
1.30 |
Bank of Montreal |
1.315 |
1.277 |
Canadian Imperial Bank of Commerce |
1.34 |
1.33 (Q2 2017) |
Toronto Dominion Bank |
1.36 |
1.32 (Q3 2017) |
National Bank |
1.35 |
1.33 |
Knightsbridge Foreign Exchange has based the opinions expressed herein on information generally available to the public. Knightsbridge Foreign Exchange makes no warranty concerning the accuracy of this information and specifically disclaims any liability for trading decisions based on the opinions expressed and information contained herein. Such information and opinions are for general information only and are not intended to present advice with respect to matters reviewed and commented upon.