Canadian Dollar Forecast May 2017
April saw a significant appreciation in the U.S. dollar, as USD/CAD rose almost 400 basis points from the first week of April to the start of May. The transition into May was even rockier for CAD as Trump began implementing protectionist policies starting with the tariffs on lumber, resulting in further U.S. dollar strength.
Summary
Most banks continue to forecast an increase in the USD/CAD pair well into Q2 where it is expected to peak. Transitioning into Q3, the USD is likely to decline. Soft commodity prices (particularly oil) and the implementations of various policies surrounding trade will likely lead to a stronger greenback entering June.
Oil Prices
Within a month, Brent Crude dropped from almost $57 a barrel to approximately $48 a barrel due to apprehension of the oversupply of oil. Oil prices received downward pressure from American oil producers as U.S. shale producers continued to ramp up supply. Shale producers were not as active before OPEC oil restrictions due to high overhead costs. Production may eventually decline once the market has hit its apex due to market saturation and producers incur a net loss instead of breaking even.
Canadian Outlook and Bank of Canada
Economic data has remained positive if uninspiring, in contrast to previous months where the Canadian labour market performed exceptionally well. Despite this, continued soft commodity prices (including oil) and dovish rhetoric from the Bank of Canada has continued to cause the loonie to drop. Contrasting monetary policy between Canada and the U.S. will continue to limit CAD upside in the short-term.
While the net effect of the tariff on Canadian lumber does not have a significant effect on Canadian exports to the U.S., this policy has caused many to question Canadian and U.S. trade relations. Trump’s threat to Canada’s dairy trade and his willingness to drop out of NAFTA has exacerbated Canada’s economic outlook. Canadian P.M. Trudeau has insisted that he will continue to protect Canadian trade interests internationally.
Compared to G-10 economies who have improved against the USD, Canada has staggered and net exports continue to decline causing major concerns for the loonie.
U.S. Economy and Federal Reserve
Upcoming U.S. fiscal stimulus and contractionary monetary policy will apply additional pressure to CAD. A potential interest hike in June could cause the USD to improve relative to other global currencies while a second interest hike after Q2 would cause a short rebound.
It is not clear how the US will bode against other currencies in the near future, particularly with the different decisions the Trump administration has made and how American oil suppliers have reacted to the oil markets.
Future protectionist policies on a global scale would have negative repercussions to all parties. The country who is more negatively impacted will find their currency drop relative to the American dollar.
FX Forecast Table (May)
Bank |
2017 – Quarter 3 (USD/CAD) |
2017 – Quarter 4 (USD/CAD) |
Scotiabank |
1.38 |
1.36 |
Royal Bank of Canada |
1.39 |
1.40 |
Bank of Montreal |
1.36 |
1.34 |
Canadian Imperial Bank of Commerce |
1.36 |
1.34 |
Toronto Dominion Bank |
1.34 |
1.33 |
National Bank |
1.38 |
1.35 |
FX Forecast Table (April)
Bank |
2017 – Quarter 2 (USD/CAD) |
2017 – Quarter 4 (USD/CAD) |
Scotiabank |
1.40 |
1.36 |
Royal Bank of Canada |
1.38 |
1.38 |
Bank of Montreal |
1.35 |
1.34 |
Canadian Imperial Bank of Commerce |
1.35 |
1.34 |
Toronto Dominion Bank |
1.37 |
1.35 |
National Bank |
1.35 |
1.38 |
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