August 2020: FX Outlook
Economic Outlook and Summary
The Federal Reserve announced a neutral stance in its July meeting, holding rates in the 0-0.25% range. Equity markets continue to surge, as tech leads the push and employment numbers remain positive. Despite the positivity, investors are increasingly adopting a risk-off sentiment as elections approach. The uncertainty is amplified by a US-China trade war with no resolution in sight as both parties indicate there will not be any further progress prior to the election.
The USDCAD has continued its path downward, as the loonie regains much of its losses from earlier this year. The loonie is currently trading at levels below last August, which is great news for Canadians in need of USD. The Bank of Canada issued a neutral stance in its most recent interest rate announcement, due to economic uncertainty and concerns surrounding the virus. Despite the dismal outlook, the job market has continued to perform well, adding 419,000 jobs in July. Going forward, the USDCAD is expected to move within the 1.33 range through the third quarter of 2020.
The US Dollar and Federal Reserve
The Federal funds rate remains at 0-0.25%, despite progress in employment and economic activity. The Fed cites their decision as being a result of slower economic growth than the beginning of the year. Equity markets continue to surge, particularly with tech leading the trend, as many companies explore online solutions to help navigate through the pandemic. The US economy also added 1.8 million jobs in July, bringing unemployment down to 10.2 percent. The USD has continued to decline, reaching levels comparable to earlier in the year, prior to the pandemic-induced recession. The declines can be attributed to a nearing election, causing investors to adopt an increasingly risk-off sentiment until results are announced. Additionally, the US-China trade war has reached a stalemate, with both parties not expecting a resolution prior to the election. With these continued factors weighing on the USD, it is expected to remain relatively suppressed throughout the end of the third quarter.
The Canadian Dollar and Bank of Canada
The Canadian dollar has continued its steady increase, reaching levels comparable to earlier this year, prior to the pandemic. The recent strength can be attributed to successful management of COVID-19, and positive economic figures. Canada added 419,000 jobs in July, bringing its job market back to 93 percent of its previous capacity. Additionally, increased oil demand, as global production ramps up, has provided significant support to the loonie. Investors are also pricing in hurricanes threatening US offshore oil production as a possible source of value for the loonie.
The Bank of Canada overnight rate remains at 0-0.25% with a neutral outlook going forward, amid economic uncertainty as the COVID-19 situation evolves. CERB programs have also been extended to further stem economic activity as the Government of Canada continues to support wages for the near-future. With much of Canada open for business, regulators are tracking the development of the virus to prevent any further economic closures that would delay the recovery.
||2020 – Q4 (USD/CAD)
||2021 – Q1 (USD/CAD)
|Bank of Montreal