Canadian Dollar Monthly Outlook- June 2016
Foreign Exchange Outlook – June 2016
Market Outlook
The USD has gained momentum towards the end of the past month. In the global economy, the Federal Reserve’s monetary policy, political events, corporate debt issues in China, and fluctuations in commodity prices have played a significant role in investor confidence and global foreign exchange markets. The US economy has been showing healthy improvement and results relative to the first quarter of the year. It is expected that there will be a monetary policy tightening by the Federal Reserve in the next few months.
Currency Outlook
Canada:
It is expected that the USD/CAD will be at 1.30 towards the end of the year. There are important factors to consider for the depreciation of the Canadian dollar recently. This includes the fact that the relative out-performance of the Canadian economy to the United States is expected to reverse in Q2. The US economy looks like it is going to recover from a weaker start. Crude oil prices have been capped at $50/barrel. However, it is been noted that commodity prices of oil have had less of a significant influence on the CAD relative to changes in short-term interest rates over the past few weeks. The forecast is that the USD will be appreciating at a steady pace against the CAD in the near time frame. This matches an historical trend of the mid-year time frame. A USD-bullish analysis sees the CAD possibly falling towards 1.35 over the next 1-3 month period.
It is expected that federal spending by the Government of Canada will enhance the value and growth of the Canadian dollar this year. Such fiscal policy by the Canadian government includes investments in infrastructure; and skills and development programs for professionals and entrepreneurs to boost productivity and growth in various industrial markets. This has the ability to accelerate and grow consumer spending, income, Gross Domestic Product (GDP), and foreign investment, increasing the demand and value for Canadian dollars. The labour market in Canada has added about 8,000 jobs each month this year, showing large results especially in Ontario and British Columbia. This has offset declines in the oil-intensive provinces such as Alberta. Following this, consumer spending will continue to remain cautious with increasing household debt and lower consumer confidence. With a weaker Canadian dollar it is more expensive for Canada to import goods such as food, resulting in inflation. A weaker Canadian dollar drives up export sales, especially south of the border to the United States as it is cheaper for Americans to purchase Canadian exports and this has the ability to grow businesses and allow them to expand with a higher volume of sales and revenue. Therefore, wages, foreign investment, and consumer spending in Canada can increase which appreciates the value of the CAD.
United States:
It is expected that the US economy will be gaining momentum with growth in output at about 2% throughout the second quarter. In the United States, household spending has increased with rising income levels, and low gas prices and borrowing costs. The unemployment rate in the US has dropped to 5% with the strongest pace of job creation in a decade and a half with increased labour force participation and wage gains. The automotive and retail sector has experienced significant growth. There has also been a boost in the services sector, including professional and consulting services. This has all developed the demand for US dollars and foreign investment for the United States.
Federal and municipal government spending has also enhanced US economic growth. However, export sales have experienced slower growth than the past. A good expansion is expected in manufacturing production throughout the rest of the year.
Monetary Policy
United States:
It is expected that the Federal Reserve will raise the target rate and the rate on excess reserves twice in 2016. The first reason is that the United States will achieve close to the inflation target rate of 2% within the next year. The second mandate of reaching full employment has ostensibly been achieved, so inflation will be the key component for the Fed moving towards the end of 2016.
Canada:
It is expected that the Bank of Canada will be neutral. The wildfires in Alberta have caused uncertainty and a lot of answered questions over the pre-fire projected forecast in terms of commodity-based exports in Canada. It seems as though GDP can rebound in Q3 but it is uncertain as to how much it can. Until exports improve in Canada, it’s difficult to see a meaningful shift in monetary policy.
Forecast Table:
Bank |
2016 – Quarter 4 (USD/CAD) |
2017 – Quarter 4 (USD/CAD) |
Scotiabank |
1.30 |
1.25 |
Royal Bank of Canada |
1.33 |
1.25 |
Bank of Montreal |
1.306 |
1.277 |
Canadian Imperial Bank of Commerce |
1.34 |
1.33 (Q2 2017) |
Toronto Dominion Bank |
1.36 |
1.32 (Q3 2017) |
National Bank |
1.28 |
1.28 (Q2 2017) |
Knightsbridge Foreign Exchange has based the opinions expressed herein on information generally available to the public. Knightsbridge Foreign Exchange makes no warranty concerning the accuracy of this information and specifically disclaims any liability for trading decisions based on the opinions expressed and information contained herein. Such information and opinions are for general information only and are not intended to present advice with respect to matters reviewed and commented upon.