October 2020: FX Outlook

Economic Outlook and Summary

Markets have remained relatively stable with investors adopting risk-averse sentiments ahead of the nearing election results. The USD has pulled back, as expected, as individuals prepare for uncertainties surrounding the administration’s policy bearings for the next four years. Equity markets have largely recovered, demonstrating stability as they set new highs; however, major banks have released plans for extensive cuts that have targeted up to 25% of their workforce in some cases. Unemployment stands at 7.9 percent, demonstrating positivity as the Dow Jones had predicted 8.2% for the month of September.

The USDCAD has rallied in recent weeks as Canada posts positive employment numbers, and investors take shelter from volatility surrounding the elections. The Bank of Canada remained silent, holding the overnight rate at 0.25% due to economic uncertainty and concerns surrounding record coronavirus cases in many provinces. Employment continues to rise as Canada posts the addition of 378,000 jobs in September, with full-time work significantly leading the increase. Going forward, the USDCAD is expected to move within the 1.33 range throughout the fourth quarter of 2020.

The US Dollar and Federal Reserve

The Federal Reserve’s rates remains at 0-0.25%, with many pushing for further, and sustained, stimulus to accelerate economic recovery. Fed Chair Powell continues to encourage lawmakers to increase and sustain government spending as he notes its success in stemming a stronger-than-expected recovery through the fourth quarter. The US economy added 661,000 jobs in September, bringing unemployment down to 7.9 percent, which is lower that Dow Jones’ estimates of 8.2% for the month. Despite this, GDP remains 3.5% below the fourth quarter of 2019, which resembles the gap seen in the 2008-2009 where GDP had fallen 3.9% from peak to trough. The effect on GDP will likely be exacerbated by a slowing recovery due to many countries shutting down in anticipation of a second wave of COVID-19. Currently, the USD has pulled back as individuals seek safety in other currencies amidst elections and negotiations surrounding the relief bill which has been partially put on hold until November 3rd.

The Canadian Dollar and Bank of Canada

The Canadian dollar has experienced appreciation against the USD recently as positive employment statistics bolster the economic outlook. Canada added 378,000 jobs in September, more than doubling census expectations of 150,000, bringing it within 720,000 jobs of its February levels, prior to the pandemic. Despite the positivity, record levels of coronavirus cases have slightly dampened the outlook, with many provinces instituting limited lockdown measures to curtail a significant resurgence. Consequently, support programs have been extended, with those not eligible for EI receiving up to $500 per week to supplement absent income.

The Bank of Canada overnight rate remains at 0-0.25%, with no further news expected in the near-term that would change the current rate. Going forward, oil prices will come into focus as non-OPEC suppliers continue to increase output, causing OPEC to reconsider its plans to ease cuts in January. With output increasing by over 1 million barrels per day, the 880,000 barrel per day cut may not be enough to sustain oil prices. Consequently, the USDCAD outlook remains unchanged, with expectations in the 1.33 range.

Forecast Table

*Forecast Table is for mid-market rates, and subject to change anytime