Canadian Dollar Monthly Update December 2016
Market Analysis
This year, the market had experienced a set of shocks resulting in higher volatility. This includes Brexit, the decision of the United Kingdom to exit the European Union, and most recently, the U.S. presidential election. It is likely that markets will remain volatile moving towards the first months of 2017. The question of whether or not the President-elect’s campaign platform can be efficiently implemented still remains with many investors and the market. However, we have seen signs that the investing community has reacted to the election results as a growth-positive event. There has been higher confidence that interest rate-hikes may happen over 2017, but it is unlikely that this has been fully priced in. It is expected that the USD will gain strength into the upcoming year in the early months, due to confidence in growth prospects and expected interest rate hikes in 2017. If interest rates hikes are announced for the future, it is likely that the USD will strengthen over the short term.
It is expected that the Canadian Dollar is at risk of weakening against the USD coming into 2017. Factors include slower growth, no signs of interest rate hikes until late 2018 from the Bank of Canada, and only a minimal level of increase in oil prices which offers little protection.
U.S. Outlook
Consumer demand and housing activity has been strong in the US, thus, raising employment and income for households. Consumer confidence is close to the highest it has been in about a decade. US unemployment is down to 4.6%, as job market activity continues to pick up. The services industry is also expanding including transportation, construction, and professional services with business growth as such services are needed. If increased infrastructure spending and personal and corporate tax cuts come into play by the Trump administration, we may see higher growth later into 2017.
Canadian Outlook
Weakness in non-energy exports and business investment is likely to limit GDP growth over the remainder of 2016. This has been the trend over the past few years. There have not been signs of increased growth in consumer spending and housing activity. Weak employment and income growth remains, relative to the United States. Even though British Columbia and Ontario have gained economic strength and jobs, this has been offset with job losses in the commodity-producing sector in Canada, mainly oil. Businesses continue to remain cautious, resulting in investor confidence to be low. It seems as though the energy-sector has gone through the contraction phase in the business cycle and could possibly see positive results with a rebound in oil prices later into the year.
EURO and Great British Pound (GBP)
A weak EURO is becoming more evident with a lack of growth within the European Union and recent undertaken policies being very ineffective for inflation expectations. Political risk is also playing out with key elections taking place in areas such as Netherlands, France, and Germany over 2017.
The GBP is still at risk due to an unclear Brexit transition process. However the UK economy has been on a healthy economic path after the decision to exit the European Union. Therefore, the Bank of England has not taken significant measures in impacting the process. The GBP is at risk to remain weak against the USD until there is more of a clear direction put forward on this exit from the EU. The GBP may be undervalued against the USD but until there is a clear picture illustrated on the transition process, it will become more evident whether or not the Brexit decision is already priced in the exchange rate.
FX Forecast Table
Bank |
2017 – Quarter 1 (USD/CAD) |
2017 – Quarter 4 (USD/CAD) |
Scotiabank |
1.38 |
1.36 |
Royal Bank of Canada |
1.34 |
1.33 |
Bank of Montreal |
1.36 |
1.37 |
Canadian Imperial Bank of Commerce |
1.39 |
1.37 |
Toronto Dominion Bank |
1.34 |
1.34 |
National Bank |
1.38 |
1.37 |
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.