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Canadian Dollar Monthly Outlook December 2018

Economic Outlook and Summary

The month of November featured the Canadian Dollar and Economy dropping to yearly lows with a bearish outlook for the near term. A major factor was the significant drop in crude oil prices since the previous month hitting lows at around January 2016 levels. There have been hints at a slightly stronger Canadian economy in the coming terms as The Bank of Canada (BOC) showed real GDP expanded by 2% per year in Q3, following a similar growth in the previous quarter. Over the month the Canadian loonie lost a significant amount over narrowing of interest rate spreads with the United States (U.S), but also the significant drop in oil prices as mentioned above which has been surrounded primarily by weaker demand and increases in supply by Saudi Arabia and the U.S. With the current economic condition, the BOC will have to be careful as they try to normalize its current monetary policy.

In the month of November, the U.S economy and greenback currency gained further strength in relation to its counterpart solely surrounded by weaker oil prices through the month. Throughout the month the U.S had their presidential midterm results released showing the vote to be split in Congress, which may make it slightly more difficult for the U.S President Donald Trump to enact more aggressive policies. Through the month of November the Federal Reserve Bank (Fed) had changed its tone on its current policy stance as it mentioned policy rates are “just below” their neutral rate, meaning they will be proceeding with a more dovish stance and softer in terms of policy rate.  It was also added that the U.S economy is close to current price stability and employment figures are close to a maximum. There are still some concerns with the U.S economy as housing figures are struggling as interest rates have been going up.

Recent projections by major Canadian Financial Institutions have indicated a bearish outlook of the Canadian economy for the time being as compared to the previous month. US strength has been consistent over the past couple months with labour and employment figures leading the charge as the Fed believes the economy is strong and is trying to aggressively 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 some economic stability in the Canadian economy as the current year is near its end. 

The US dollar and the Federal Reserve:

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As the USD is soaring to the highest levels in over a year, do not be surprised if we see a decline in momentum. After performing relatively well throughout 2018 it seems the USD has reached its peak as we will see a moderation of monetary policy tightening by the Federal Reserve. This reversal could stem from potential risk in global financial markets. The US economic data could be on the downside due to struggling housing markets and rising interest rates and inflation. When the US dollar does come back down in 2019 this could be a benefit to other currencies specifically with China’s yuan. We could see a change in China’s currency policy to allow for a stronger yuan versus USD, which could add to trade tensions between the US and major trade partners.

The Canadian dollar and Bank of Canada:

While 2018 has been a down year for the loonie, there is a positive outlook for 2019. As it is expected for the USD to drop off in the coming months, the loonie will benefit in 2019 and find support from better spreads and higher oil prices. Based on current risk aversion we potentially could see the USD/CAD trend closer to 1.25-1.27 midway through 2019. The loonie’s rise throughout 2019 will not be as smooth as anticipated as Canada’s current deficit remains large. This will increase the loonie’s volatility and cause some instability. Also, in 2019 we expect the Bank of Canada to downgrade GDP forecast in the upcoming monetary policy report. Chances of a rate hike in January are low which means most likely we will not see a rebound by the loonie until mid-2019 assuming oil prices bounce back as expected.

Oil Prices

During the month of November oil prices took a beating as it incurred a significant drop in price, this was significantly affected by global oversupply in oil with U.S sanctions on Iran slowly creeping in as the price of WTI which held around $64 to begin the month. Through November the price of WTI took a notable dip falling to levels of $56 as Russia was also considering oil production cuts. Significant players such as Saudi Arabia adding to the global oversupply as demand not moving too much causing an economic slowdown. The month of November caused WTI to close at a price of around low $52 range. With such losses through the month it resulted in the commodity linked loonie to become one of the worst performers through the month. We will continue to watch the price of oil as with the current OPEC meeting in the coming days it may give a clearer projection for the loonie.


FX Forecast Table December 2018

Bank 2019 – Quarter 1 (USD/CAD) 2019– Quarter 2 (USD/CAD)
Scotiabank 1.32 1.30
Royal Bank of Canada 1.35 1.34
Bank of Montreal 1.27* 1.27*
Canadian Imperial Bank of Commerce 1.29* 1.31*
Toronto Dominion Bank 1.27* 1.27*
National Bank 1.30 1.27

*Figures based on previous month

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By KBFX | December 11, 2018 | Monthly Canadian Dollar Outlook/Forecast | 0 comments