Canadian Dollar Monthly Outlook February 2018
Economic Outlook and Summary
Throughout the month of January the Loonie continued its rally, starting the month off with stronger than expected employment figures resulting in current level of unemployment at 5.7%. The Bank of Canada (BoC) kept inflation expectations the same for the upcoming quarter as labor costs were rising, resulting in a rise as minimum wage. The commodity-sensitive Loonie rally was underpinned by rising WTI prices through the month. The BoC announced the decision for an interest rate hike this past month to the current level of 1.25%. The Canadian Economy has shown relative strength, as Canadian GDP figures showed an expansion of 0.4% over the month of November. NAFTA talks persisted with little progress, but speculation around Canadian authorities expressed that U.S President Donald Trump was going to announce the withdrawal from NAFTA. However, Canada will stay at the table if in the case it would occur.
Moving towards the upcoming month, January showed the U.S economy going into recovery mode as U.S. employment figures yielded better than expected figures. This included wages on the rise to record its largest annual growth in the last 8 years. This data however is surrounded by the expected increase in inflation in the coming month as the Fed is trying to take control of its monetary policy tightening with multiple rate hikes coming in the upcoming year. The U.S. economy has been experiencing a current rise in its Treasury bond yields. This resulted in strong bearish pressure on the greenback as Chinese officials have eased and recommended slowing on the purchases of such Treasury bonds. The US government briefly shut down, coupled with comments made by the Treasury Secretary, endorsing a weaker U.S. dollar would be more beneficial to the economy.
Recent data being released by major Canadian Financial Institutions has indicated the expectation of the Canadian economy to maintain its current strength with strong employment figures. Most of these institutions have updated their figures reflecting a moderate alteration, showing potential economic stability in the Canadian economy and a potential for U.S growth through the mid-year.
Oil continued its rally through the month of January with a bullish run-up in crude oil prices (WTI). One big factor causing for this change was surrounded about the current OPEC supply deal, where Saudi Arabia’s energy minister informed media that many producers were in understanding and extending the present supply cuts. Events through the month resulted in WTI to bottom out at a level of mid $64. The current strength of oil has resulted in the backing for current rally the commodity-sensitive Loonie. Potential momentum of oil prices can continue, if seen that OPEC decides to continue with the current supply cuts, and finalize an extension.
The Canadian Dollar and Bank of Canada
The Loonie performed well to begin 2018 due to the broad-based weakness in the US dollar. Canada data including employment and GDP growth forced the central bank to upgrade its forecasts and to raise the overnight rate to 1.25%. The Loonie was able to rise in part to the lackluster US dollar and rising world oil prices. We expect the greenback to recover on the back of a more aggressive fed, changing oil prices, and as the Canadian economy transitions towards higher interest rates. The Loonies’ descent could be impacted by the outcome of NAFTA negotiations.
The USD and the Federal Reserve
The New Year was not kind to the US dollar, with the currency experiencing its worst month on a trade-weighted basis since 1973. Near-term interest rate developments could bring some temporary stability, as US policy makers will be working towards raising rates again soon. Expect to see direct investment capital inflows into the US, along with corporate tax cuts to help stabilize the greenback in the next couple of quarters. While the US dollar could remain on the low side over the near term, a push forward later in the year is a possibility. We could see the Fed’s deliver more than the two-interest rate hikes that markets are currently expecting for this year.
FX Forecast Table February 2018
||2018 – Quarter 2 (USD/CAD)
||2018 – Quarter 3 (USD/CAD)
|Royal Bank of Canada
|Bank of Montreal
|Canadian Imperial Bank of Commerce
|Toronto Dominion Bank
*Figures based on previous month
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