Canadian Dollar Forecast October 2015
Canadian Dollar Forecast October 2015
The main story line for the Canadian dollar in 2015 continues to be the US economy, as economic conditions continue to improve relative to the global economy. Although the Fed elected to delay policy tightening in September, it is still highly expected that they will do so before 2016. Ultimately, this will be contingent on the strength of the US economy, and the alleviation of concerns arising from weak global growth and market volatility. Key drivers for the US economy for the months to come continue to be consumer and housing data, labour market and wage growth, and overall consumer confidence to bolster demand.
The forecast for the Canadian dollar has made little improvement since September. Oil and gas investment has continued to decline at a rapid pace leading to an economic contraction, and technical recession, in the first half of 2015. This has affected consumer and business confidence, with spending projections falling in the short-medium term. While the labour market and auto sector continue to perform well, they will need to be monitored for continued strong performance as poor manufacturing, business investment, and weak wage growth continue to hamstring Canadian economic growth.
Canadian dollar bears have benefitted throughout 2015, as the Canadian dollar has continued its precipitous drop, falling to a new 11-year low. Weak commodity prices and divergent monetary policies have been the primary factors facilitating the Canadian dollar’s decline. While a weak dollar supports the case for increased exports, tepid global growth and volatility in China will put downward pressure on the global export market. As a result, Canadian dollar bears will be looking for weakness in commodity prices, the Canadian economy, and global growth prospects.
Canadian dollar bulls continue to struggle as the Canadian economy has shown muted signs of improvement. Weak commodity and oil prices, divergent central bank policy relative to the U.S., and weak global economic outlook continue to plague the Canadian dollar. The expected benefits of the low Canadian dollar have yet to result in the non-energy export led growth that the Bank of Canada has been expecting. A rate hike by the Fed before the start of 2016 will lead to further softening of the Canadian dollar. An important date for both bulls and bears this month is the Canadian Federal Election taking place on October 19th, which is likely to impact FX markets. Canadian dollar bulls will be looking for oil prices to improve, the Canadian economy to show signs of stabilization, and eventually the Bank of Canada to start discussing inflation and growth towards a rate hike at some point in 2016.
Summary
For the coming months, the U.S. dollar and Canadian dollar pair continues to break through resistances, with the Canadian dollar seldom able to find support. Some year-end targets are projecting a USD/CAD rate between $1.3500 and $1.3700. Oil prices and the domestic Canadian economy will play a big role in how the Canadian dollar moves.
Oil Prices
After reaching lows below $40 a barrel in August, oil prices have rebounded to the $45/barrel range as of late. Expectations for oil prices in the near future remain weak as the supply of oil remains high, with OPEC’s largest producers reluctant to cut production. This will continue to suppress the Canadian dollar and the Canadian economy at large, as oil and gas companies continue to decrease investment and capital expenditures.
Canadian Economy and Bank of Canada
The Canadian economy continues to be restrained by decreases in oil, gas, and commodity investment. Tepid global growth and market volatility in China has dampened the global export outlook, delaying the Bank of Canada’s plan for non-energy led export growth. Other factors contributing to a weak Canadian economy include poor business investment, weak manufacturing, and low wage growth. Economic growth is expected to improve modestly towards the end of the year with projections of year-over-year growth to be approximately 1%. This economic growth will be supported by continued record vehicle sales, a pick-up in auto production, and a growing labour market. Overall, headline inflation remains around 1%, with core inflation slightly higher at 2%. It is expected that the Bank of Canada will keep interest rates at 0.5% pending further economic data.
U.S. Economy and Federal Reserve
The US economy is beginning to gain momentum as a result of strong consumer spending (especially in the auto sector) and housing activity. Furthermore, favourable labour market statistics, low borrowing costs, and low oil prices continue to support robust consumer confidence which will continue to fuel consumer spending throughout the third quarter. Although a strong U.S. dollar continues to hurt the U.S. export sector, solid domestic spending will facilitate continued expansion in manufacturing production. Overall, core inflation remains sluggish, slightly below the Fed’s target of 2%. It is still expected that the Federal Reserve will increase the overnight lending rate by 25 basis points before the start of 2016 which may push the U.S. dollar to new highs. However, expect the Fed to continue to be highly conservative in tightening monetary policy as to avoid stalling a fragile domestic and global economy.
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