Canadian Dollar Monthly Outlook January 2018
Economic Outlook and Summary
The month of December lead off with the decision of overnight interest rates to stay steady at the current level of 1%. The Bank of Canada’s decision showed its cautious position while maintaining the conclusion that the Canadian economy would need less monetary stimulus over the long term. These hawkish comments led to the recovery and boost in the local currency through the mid-month of December. Employment gains resulting in the unemployment rate to drop to 5.7% coupled with rising crude oil prices underpinned CAD strength. These impressive labour market results have made January a “live” meeting for the Bank of Canada, where a 25bp rate hike is the current expectation.
Markets fully priced in the interest hike for the month of December in the U.S. as the current federal funds rate sits at 1.5%, while the Fed is continuing its schedule on normalizing its Balance Sheet. The slid of the US dollar throughout the month began with uncertainty of the U.S. tax bill being legalized before the upcoming New Year. This, alongside U.S. unemployment rate remaining stagnant at 4.1% and rising crude oil prices contributed to the under performance of the U.S. Dollar for the month. NAFTA talks still have yet to yield any progress as the U.S. representatives have made several challenging demands in relation to content guidelines.
Recent data released by major Canadian Financial Institutions has indicated the expectation of the Canadian economy to maintain its current strength. Most of these institutions have updated their figures reflecting in a moderate alteration, showing an expectation of economic stability in the Canadian economy.
Oil Prices
Oil prices throughout the month of December capitalized on delays in pipeline repair and falling US crude inventories. WTI maintained a bullish approach to its highest level since mid-2015, as tensions increased amid the current political turmoil occurring in Iran. Current levels resulted in the rally of oil prices boosted with the voluntary OPEC led supply cuts to maintain oil restrictions until the end of 2018. This resulted in WTI maintaining a level above $60 going into the new year. Current momentum can potentially lead to an improvement in value for the commodity-sensitive Loonie.
The Canadian Dollar and Bank of Canada
The Canadian dollar ended 2017 on a high note as we saw seven straight daily declines in December that took the USD/CAD price down to 1.25, which is a 50% retracement of the range in September and October. The price of the USD/CAD exchange rate fluctuated significantly off 1.2062 in early September to 1.2917 in late October which did not leave much optimism for traders to round out the year. Despite the Loonie’s sudden up rise, CAD’s rally could be short-lived, as the Bank of Canada moderates its interest rate trajectory. The Bank of Canada has become increasingly cautious following the Loonie’s appreciation subsequent to 2017’s two rate hikes. However, the better growth outlook in Canada as well as the stable political environment opens to opportunity for gradual appreciation in the future for the Canadian dollar.
The USD and the Federal Reserve
The US dollar has endured a difficult start to 2018, with the dollar index hitting a three-month low despite three rate hikes from the Fed’s the previous calendar year. Possible reasons for the sudden weakness in the dollar could stem from a drop in US treasury bond yields. This gives reason for markets to speculate higher interest rates in the United States in 2018. As the leadership at the Federal Reserve will be changed this year, the fall in US treasury yields is widely blamed on expectations of the future federal reserve interest rate policy. Markets are unsure as to what policies the new brain trust will pursue, but expect the Feds to raise interest rates at least three times in the new year.
FX Forecast Table January 2018
Bank |
2018 – Quarter 2 (USD/CAD) |
2018 – Quarter 3 (USD/CAD) |
Scotiabank |
1.27* |
1.26* |
Royal Bank of Canada |
1.30 |
1.27 |
Bank of Montreal |
1.30 |
1.29 |
Canadian Imperial Bank of Commerce |
1.30* |
1.32* |
Toronto Dominion Bank |
1.23 |
1.23 |
National Bank |
1.21 |
1.24 |
*Figures based on previous month
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