Canadian Dollar Monthly Update March 2018
Economic Outlook and Summary
Through the month of February, the loonie saw its rally come to an end, with selling pressure occurring because of GDP figures showing the economy was expanding at 0.1%, falling short of expectations. The commodity-linked loonie saw this sell-off come in concert with a sharp fall in oil prices, occurred throughout this past month, as it hit 2018 highs within the level of $65 WTI. As Labour data was being released for the Canadian economy, it did not help the current slide in the beginning of the month, positing unemployment increasing to 5.9%, resulting from the massive loss of part-time jobs corresponding to the 20% rise in minimum wage that was taken into effect on January 2018. The Bank of Canada showed dovish tones as they stayed firm on their cautious monetary policy, in which they will accommodate the appropriate action in order to operate near the inflation target, giving rise to the higher possibility of interest rate hikes. The month of February concluded with U.S. President Donald Trump mentioning he will be executing an order to impose import tariffs of 25% on steel and 10% on aluminum. As Canada is the largest exporter of steel to the U.S these effects are still unspecified. NAFTA negotiations remain to be sources of downside risk for the Canadian economy.
As we headed into the month of February the green back showed much promise with employment figures coming in much stronger than expected. The U.S. dollar showed further strength as U.S. wages increased, the largest annual growth in over 8-years. As the greenback was gaining strength it also showed the Fed following its tight monetary policy, while the U.S. lawmakers reach a two –year settlement. As slight falling treasury yields came through the month, it resulted in some selling pressure. As mentioned earlier, the President Donald Trump announced he will be imposing tariffs in the steel and aluminum industry, giving rise to a potential trade war. The effects and details of this decision are still unknown and will have to be factored into the future performance of the U.S. economy.
Recent data being released by major Canadian Financial Institutions has indicated the expectation of the Canadian economy to gain some strength with stronger oil prices. Most of these institutions have updated their figures reflecting in a moderate alteration, showing potential economic stability in the Canadian economy and a potential for U.S growth through the mid-year.
Oil showed a sell-off occur in the month of February, linking it to the slide of the commodity-linked currency, the loonie for the month as well. Canadian oil was selling at a discount to U.S oil refineries, as the U.S. now has plenty of its own shell oil not needing as much supplied from its northern neighbor. The price of WTI is currently sitting at the level $61.65USD. There could potentially be momentum of oil prices to 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 Canadian dollar began the year strong but traded poorly throughout the month of February as the loonie delivered the worst returns of any G-10 currency versus the USD. Higher US interest rates have brought the US to Canada short-term spreads to around 50bps. Rising inflation pressures should prompt the Bank of Canada to raise interest rates further, however, the extent of these monetary adjustments will depend on the outcome of the NAFTA negotiations. The strengthening US and global demand should result in export improvements this year if pressures from US protectionism do not come into factor. The average of the Bank of Canada preferred measures of core inflation rose to 1.8% in January which will continue to be impacted based on increases in wages, prices and tariffs.
The USD and the Federal Reserve
The US dollar’s weak performance to begin the year left us with expectations that it would trade conservatively overall in 2018. In February we began to see a turnaround, as the USD did improve which leaves the next few weeks unsettled. The US government’s decision to implement tariffs on steel and aluminum products has provided instability into markets and caused uncertainty for economic prospects. In the short-term, the USD may continue to push higher, but there is little confidence that these improvements can be sustained in the long-run due to rising fiscal and trade deficits. US congress resorted to another fiscal stimulus aside from tax cuts, which was to increase spending caps. This caused an upgrade to our US GDP growth forecasts by half a percentage point. The budget deficit, which is projected to rise next year past $1 trillion US, will have to be addressed and dealt with through spending cuts and tax hikes. By increasing Treasury yields to nearly 3%, financial markets are showing signs of concern and have limited tolerance for fiscal indiscipline. The US dollar is unlikely to be successful in such an environment, even with rate hikes looming in the near future.
FX Forecast Table March 2018
||2018 – Quarter 3 (USD/CAD)
||2018 – Quarter 4 (USD/CAD)
|Royal Bank of Canada
|Bank of Montreal
|Canadian Imperial Bank of Commerce
|Toronto Dominion Bank
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