Canadian Dollar Forecast December 2015

Canadian Dollar Forecast December 2015

The US dollar is likely to remain bullish towards the end of the year as the US economic conditions continue to improve relative to the global economy. The Fed is heavily expected to raise rates in December and this normalization in monetary policy before 2016 will support demand for the US dollar. In the wake of additional quantitative easing in Europe, a rate hike by the Federal Reserve could lend additional strength to the US dollar, as divergent monetary policy becomes increasingly salient. Ultimately, the main drivers for the U.S. dollar are continued signs of growth in the economy, anticipation of widening interest rate differentials before the years end (as reflected by yield spreads), and relative monetary policy between the US and other major global economies.

The bearish outlook for the Canadian dollar continues as Canadian economic data continues to underwhelm. When coupled with a highly anticipated interest rate increase by the Fed in December, risk is likely to the downside for the Canadian dollar. A year-end close in the range of 1.34-1.36 USD/CAD remains possible. In the medium-term, Canadian dollar buyers and sellers will need to monitor for any significant changes in Canadian economic data, commodity prices, and monetary policy from the Bank of Canada.

As the New Year draws near, Canadian dollar bears can be are hoping for more of the same in a continued downward trend for the Canadian dollar. Analysts remain bullish on the US dollar as the Fed is anticipated to raise interest rates in December. This should have a flow of funds in to the US Dollar.  The neutral-dovish stance provided by the Bank of Canada is a stark contrast. As mentioned in last month’s forecast and reinforced by poor Canadian economic data, the Bank of Canada’s stance is unlikely to change in the near future as the Canadian economy continues to enjoy increased competitiveness in the export sector. Furthermore, the US dollar has historically performed well against the Canadian dollar in Q4 and Q1. Canadian dollar bears should remain aware of any sharp upward changes in commodity prices, significant improvement in the domestic economy, or stance in monetary policy as potential risks that can slow the Canadian dollar bear case.
Canadian dollar bulls will need to see stronger economic data in Canada and the labor market. While signs of recovery are apparent in export, residential investment, labour market and consumer spending data, more of this is needed to change the pulse for the loonie. According to recent business confidence surveys, hiring intentions going into 2016 are soft indicating lackluster job growth in the New Year. This will trickle into soft consumer confidence, weak inflation data, and continued poor business investment going forward. Overall, these factors will likely hinder economic growth in Canada for the near to medium term future and Canadian dollar bulls will have to be patient in waiting for the Canadian dollar to bounce back.  It all starts with the economy and jobs and of course higher oil prices will help.

Summary
For the coming months, the U.S. dollar and Canadian dollar pair continues to test new extremes with targets set around 1.33 and as high as 1.36 by year end.  However, much of the news is already priced in to the US dollar.

Oil Prices
Oil prices for the near to medium term will likely remain low as prices remain well below $50 a barrel. Overall, continued global retrenchment in the oil & gas industry will need to endure in order to rebalance supply and demand conditions needed for resurgence in oil prices. This will continue to adversely affect the Canadian dollar, and will likely support the Bank of Canada’s neutral stance on monetary policy for the foreseeable future in order to bolster export competitiveness.

Canadian Economy and Bank of Canada
The Canadian economy has shown signs of improvement in the export, residential investment, and consumer spending areas, with full year growth projected at an average of 1.25% in 2015. Increased market uncertainty heading into 2016, however, has lowered business confidence. In concert with high household debt, weaker consumer confidence and is likely to adversely affect consumer spending, and inflation in 2016. In addition, due to poor business confidence, the labour market will likely not perform as well as it has in 2015. Lastly, this will contribute to continued weakness in business investment necessary to grow the Canadian economy. Other factors putting downward pressure on the economy for the foreseeable future are weak business investment, weak energy prices, and soft manufacturing sector. Overall, headline inflation is approximately 1% year over year, and core inflation is slightly above 2% year over year, mainly due to pass-through effects of a weaker Canadian dollar.

U.S. Economy and Federal Reserve
The U.S. economy has continued to show signs of improvement on the back of consumer spending and housing activity with estimates around 2.25% year over year. It has also been supported by strong growth in labour markets, consumer confidence, strong household finances, rising wages, and low borrowing costs. To date, the U.S. job market is approaching full employment, as unemployment has reached a seven-year low of 5%, and will likely remain near those levels for the near future. Furthermore lending conditions are still expected to tighten very gradually and should not impede the U.S. recovery. This is further supported by an increase in capital goods orders hinting at improving business investment. The strong U.S. dollar will weaken both the export and manufacturing sector. However, if strong domestic activity can persist, modest manufacturing growth can continue to thrive on the back of consumer electronics, auto sales, and home furnishings. Overall, core inflation is over 2% year over year with headline inflation expected to realign with core inflation around 1%.

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.