Canadian Dollar Forecast August 2015

Summary
Stemming from improving economic conditions in the US, the US dollar can be expected to remain strong and continue strengthening as the year closes. This notion can be catalyzed by an anticipated gradual rate hike in the fall as labour market conditions continue to improve.

The Canadian dollar has taken a hit in recent weeks dropping approximately 4% in July. Unseen since 2004, this trend is anticipated to continue. The biggest drivers behind the Canadian dollar weakness continue to be persistently low oil prices, poor commodity price performance, and contingent monetary policy.
In determining future exchange rates, Canadian and U.S., economic data, monetary policy, and commodity prices remain the main drivers of the Canadian dollar.

Canadian dollar bears can continue to feel relatively safe as the U.S. economy continues to bloom coupled with strong expectations of a Fed rate hike in September. Positive U.S. data related to jobs, manufacturing, construction, housing, and consumer spending will help sustain the Canadian dollar bear case. Another recent factor supporting the bear case is poor sentiment coming from recent volatility in China’s markets paired with poor global growth outlook. In terms of Canadian drivers, Canadian dollar bears can depend on persistently low oil prices in continuing to limit Canadian dollar strength. Furthermore, interest rate differentials and widening stances on monetary policy between the Bank of Canada and the Federal Reserve can push the U.S. dollar higher while keeping the Canadian dollar relatively low.

Canadian dollar bulls need to hope that the US Federal Reserve continues to delay an interest rate hike timing. Perhaps a blip in job growth or wage growth data could be the catalyst. Domestically, the Canadian economy needs to improve before the Canadian dollar will gain some steam. An uptick in non-energy exports is a sign that everybody will be watching, including the Bank of Canada to see if its policy is working. Any uptick in oil prices will also provide a significant boost to the Canadian dollar. Canadian dollar bulls can also hope that much of the main drivers of weakness may now be priced in.
As to what to expect in the coming months, the U.S. dollar and Canadian dollar pair are close to ten year lows and will likely hover in the 1.30 USD/CAD range.

Oil Prices
With oil prices slumping again in recent weeks and with no sign of recovery in the near term, they have become a big factor again in the Canadian dollar’s weakness. If oil prices amongst other commodity prices remain low, the Bank of Canada’s increasingly dovish stance may produce another rate cut.

Canadian Economy and Bank of Canada
Optimistic forecasts at the first half of the year proved too good to be true as the Bank of Canada cut rates to .5% in July. Annualized GDP decreased by .6% in Q1 with Q2 growth expecting to be close to zero. The trend is expected to continue into the second half of the year with weak growth predicted at around 1.25% year over year. However, this yearend growth will largely stem from pass-through effects related to the weak Canadian dollar and have the potential to be negatively affected by a loosening stance on the output gap by the Bank of Canada. Overall core inflation has lifted slightly to above 2% again, largely due to Canadian dollar pass through effects.

U.S. Economy and Federal Reserve
The U.S. economy has continued to meet expectations with improvement in consumer and housing data. The U.S. labour market has also surprised and displayed very strong signs with strong job and income growth evident in the seven year low unemployment rate of 5.3%. Catalyzed by persistently low gas prices, consumer spending can be expected to continue boosting housing data and should trickle through to increased business investment from increased business sales. Because of all this, the Federal Reserve is expected to start normalizing interest rates in September; however, it is expected to be gradual enough to not stiffen lending conditions drastically. This will help offset poor export figures stemming from the strong U.S. dollar and the generally weak global economic picture.