Economic Outlook and Summary
Overall, not much change has occurred since last month’s currency forecast. Although the US Dollar has potential to strengthen at times, due to a return of risk aversion, it is expected that the USD will continue to trend downwards. Hopefully our world leaders leave the global trade flows unhampered which will weaken the USD and thus improve the Canadian Dollar (CAD). Compared to last month where the Fed was focused on slowly increasing the rate, it looks like they are willing to adjust for the target rate and thus consider rate cuts, if the economy needs it.
It is evident that oil is reasserting itself as Canada’s main driver for our currency as the price jumped 18% in January, selling at $54US/barrel. The oil market is almost at a balance so if there is either an unexpected decline in supply or an unexpected increase in demand, that could end in another excess demand situation, thus increasing prices for oil globally. Another way our loonie could benefit this year is through capital inflows. The USMCA deal and trade are highly important when looking at Canada’s economic prospects with the hope of an expected moderation in domestic demand. With a better outlook for the CAD, besides the weakness of the USD, and less uncertainty with regards to trade, foreign investors will hopefully find Canadian assets more attractive.
The US dollar and the Federal Reserve
The US dollar has weakened against most major currencies in the month of January. Several ongoing issues in the global economy and financial markets have negative implications for the U.S economy. The partial U.S government shutdown, trade tensions with China, and slowdowns to global growth forecasts have led the U.S Federal Reserve towards a dovish shift. Their change in stance means that the Committee will adopt a more cautious and patient approach to policy normalization. Resulting from the Federal Reserve’s restrained ability to tighten U.S monetary policy much further the US dollar is expected to trend downwards till some market jitters clear. We still expect two rate hikes this year in the later parts of the year, however it could be possible that the Feds cut rates instead should the economy need it.
The Canadian Dollar and Bank of Canada
The loonie took a major downturn at the end of 2018, but so far in 2019, it looks like it is making a smooth comeback. It outperformed many other currencies such as the Australian Dollar (AUD), New Zealand Dollar (NZD) and the Norwegian Krone, with an advancement of 4% against the USD. Due to consumption spending, which is already struggling, as well as fading housing wealth effects, there isn’t a high need for an aggressive monetary policy stance from the Bank of Canada. The central bank warned that there is downgrading in its 2019 forecast for Canadian GDP growth. In other words, CADUSD spreads are not likely to drastically improve this year. However, this doesn’t necessarily mean that the CAD will struggle in 2019 – if the forecast is accurate and the trade flows are unimpeded, we could see the USDCAD moving closer to the original target rate of 1.27 by mid-year.
For the month of January Crude Oil closed positive as the commodity managed a gain near 18%. The price of Crude Oil has breached the $50 price mark reaching as high as $55 per barrel. Currently oil prices in the global market are heavily driven by the ongoing China-US trade war which has influence on both market bulls and bears. However, OPEC’s decision made in December 2018 to cut production and supply has continued to provide solid support to prevent sharp downside moves. Weekly charts for the month of January will show steady growth, but daily charts will reveal high volatility whereby bears have fought for control at every turning point this month. Aside from news driven momentum Crude Oil is still lacking enough support for bulls to generate and sustain a positive price rally.
FX Forecast Table February 2019
|Bank||2019 – Quarter 2 (USD/CAD)||2019– Quarter 3 (USD/CAD)|
|Royal Bank of Canada||1.34*||1.33*|
|Bank of Montreal||1.33*||1.33*|
|Canadian Imperial Bank of Commerce||1.31*||1.32*|
|Toronto Dominion Bank||1.30*||1.28*|
*Figures based on previous month