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Canadian Dollar Monthly Outlook April 2019

Economic Outlook and Summary

The Federal Reserve announced that it would not raise interest rates for 2019 and it does not look like they plan for any rate hikes until next year. An inverted yield curve in the U.S. is alarming the Fed and investors all over as it shows signs of an oncoming recessionary period and slower growth of the global economy. The USD retains a firm position versus its major currency peers however remains contained to the broader ranges in place in recent months, also there is skepticism around gains extending beyond the short-term period.

Global oil prices have recovered with upward price action that has occurred every month of this year. Crude oil increased net 7% over opening and closing prices for the month of March. Geopolitical concerns continue regarding the course of the Venezuelan power outage and the US-China trade talks which could impact oil supplies and prices. The CAD performed poorly against the USD again in March as the trend continued in 2019. Falling interest rate spreads and an inverted yield curve in the U.S. were likely to blame for the loonie’s struggles this month. BoC will look to change their approach regarding Canadian Interest rates as reports of weak economic activity and GDP pour in. Markets are now projecting rate cuts from BoC to help elevate the CAD.

The US dollar and the Federal Reserve

The Federal Reserve’s announcement in March with regards to policymaking was to hold interest rates steady this year by indicating no hikes will be coming this year. Just three months earlier the central bank projected two hikes would be appropriate for 2019. The Fed’s hawk to dove shift reflects its concern on their domestic economy and the global economy. The Fed is also concerned about the possibility of an inverted yield curve because the last three recessions were preceded by an inversion of the yield curve. Despite the Fed’s dovish message in March, the US dollar was still able to gain due to a slowing world economy, higher risk aversion and further loosening of monetary policy by other major central banks. If trade-related uncertainties dissipate and the global economy bounces back, it could weigh on the greenback.

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The Canadian dollar and Bank of Canada

The loonie performed underwhelmingly against the USD again in March, marking the largest monthly drop since the start of the year. Despite oil prices being on an upwards trend, the effect on the Canadian dollar was countered by worsening Canada-U.S. interest rate spreads. Interest rate differentials explains why the CAD is falling and it looks to stay in this position for now. Recently sluggish economic data and GDP results have resulted in BoC to rethink their expectations about Canadian interest rates. We do expect the economy to bounce back in the second quarter of the year overcoming the 18Q4-19Q1 soft patch along with a U.S rebound while oil production targets return to normal. Markets are now preparing for a high probability of rate cuts by the Boc by September 2019 helping to elevate the CAD.

Oil Prices

While oil prices have seen range bound actions, the price of US Crude oil in the global market has seen monthly upward price action every month this year. In the month of March spot US Crude oil increased over 7% in value when comparing the monthly open and close prices. OPEC’s enforcement of production and supply cut agreement has steadily helped improve the supply to demand ratio in the global market which has served as a long-term supporting factor for crude oil bulls. In March crude oil was also positively supported by optimism surrounding Sino-US trade talks and headlines stating crude oil output and exports from Venezuela was down by 60% due to US sanctions being imposed. However, crude oil price gains have been capped by weekly US stockpile data indicating high crude oil inventories.

FX Forecast Table April 2019

Bank 2019 – Quarter 2 (USD/CAD) 2019– Quarter 3 (USD/CAD)
Scotiabank 1.32* 1.30*
Royal Bank of Canada 1.34 1.34
Bank of Montreal 1.34* 1.33*
Canadian Imperial Bank of Commerce 1.31* 1.32*
Toronto Dominion Bank 1.33* 1.33*
National Bank 1.32 1.29

*Figures based on previous month

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By KBFX | April 10, 2019 | Monthly Canadian Dollar Outlook/Forecast | 0 comments