Canadian Dollar Forecast October 2018

Economic Outlook and Summary

The month of September the Canadian Dollar and Economy showed to gain traction, as the month showed a clearer economic picture near the end of the month as uncertainty still loomed in the beginning of the month and resulted in a weaker Loonie. After many months of negotiations with NAFTA it led to an agreement replacing the original trilateral trade deal with the United States (U.S.) and Mexico labelled as United-States-Mexico-Canada Agreement (USMCA). This will ensure Canadian tariff free market access with U.S. exports, leading to a revised economic outlook for the Canadian economy as it is expected to appreciate alongside with the Loonie. The USMCA agreement saw the Loonie reach a level of around $0.78USD, which has been the strongest in the last 4½ months. This alongside with an increase in Canadian-U.S. interest rate spreads helped boost the commodity linked Loonie. With a clearer settlement of NAFTA negotiations, the Bank of Canada has hinted at a possibility of a rate hike in the current month and a few more in the upcoming new year as they continue its monetary tightening policy.

The U.S economy showed to still be going strong through the month of September as the U.S. dollar had started the month off on a high but was later seen depreciating against the Canadian Loonie as a deal was struck with NAFTA. Throughout the month the Federal Reserve Bank raised it fed funds rate by 25 points to a level of 2.00-2.25%, as they have continued to proceed with its normalization of its current monetary policy.  With the current strength of the U.S economy the Fed has also hinted at future interest rate hikes in September, with a possibility of three more in the upcoming year. The greenback saw it depreciate through the past month as the U.S, Mexico and Canada have struck a trilateral trade agreement formerly known as NAFTA but renamed to USMCA. Some of the weakness in the U.S can be settled by some of the ongoing trade tensions between China and the European Union, in which once are settled will have a clearer outlook for the U.S economy.

Most recent data releases by major Canadian Financial Institutions have indicated an improved outlook of the Canadian economy once again as compared to the previous month. US strength has been substantial over the past couple months with labour and employment figures staying steady as the Fed believes the economy is strong and is trying to stay on top of its current monetary policy. Most of these institutions have updated their figures as it may be seen in the chart below and is showing potential economic stability in the Canadian economy as USMCA has been established.

The Canadian Dollar and Bank of Canada

The NAFTA deal that was recently agreed upon has given the loonie a boost. The Bank of Canada also is looking to announce a rate hike this month which should help maintain the dollar’s strength through October. The announcement of the trade deal with the US removes any monetary policy normalization by the Bank of Canada. The central bank can now focus on addressing inflation pressures. The support from the oil price should allow the Canadian dollar to trade well against the USD. In the short term the USD/CAD rate of 1.30 should be short-lived. As long as oil prices keep trending in the right direction there is potential to go down to 1.25.

The USD and the Federal Reserve

Throughout 2018 we have seen the US dollar doing well, which has been maintained throughout by safe haven flows from emerging market woes and tighter monetary policy. It’s unclear if the US dollar can upkeep its momentum to next year especially when investors will focus on the US budget deficit and fiscal stimulus. The feds continued to utilize monetary policy by raising the fed funds rate again in September and have hinted that more hikes are on the horizon. By the end of 2018 there is speculation of one more hike with three additional hikes looming next year. There is less optimism for the US dollar in 2019 as trade tensions would need to fade with China and the European Union for the USD to avoid any weakness.

Oil Prices

Oil prices started the month of September on an upward momentum as it was sitting at a WTI level of around $69, as the commodity linked Loonie benefited through surge in prices over the month. Some of this volatility in oil prices was surrounding Venezuela’s declining oil production. This trend had continued as the beginning of the month had shown the price of oil move upward with production increases offsetting sanctions place on Iran by the U.S. Currently the price of WTI is sitting around a mid-$74 level as it did hit the end of the month on an upward trend. We can continue to watch the price of oil as it’s continual rise will result in a boost for the commodity linked Canadian Loonie.

USD CAD Forecast October 2018

*Figures based on previous month