Canadian Dollar Monthly Update May 2019
Economic Outlook and Summary
The Bank of Canada is currently following in the footstep of the Federal Reserve by taking a more dovish stance and downgrading the outlook in accordance to the reality of available data. The struggling Canadian dollar has been largely range-bound between 73 and 77 U.S cents since last summer, still lacking the scope for a sudden upward push. Over the last few months, the main variables have had offsetting push and pull effects on the loonie. Support for the loonie came from commodity prices and risk-on sentiment, while yield spreads have pushed against it. Unfortunately for the Canadian dollar, the latter has carried a greater amount of significance.
Any upside for the Canadian dollar will be limited, as long as U.S-Canada interest rate spreads remain constrained and geopolitical risks remain in play. Despite the global economy starting to show signs of improvement it is too early to get excited; the test will be on evidence to prove that momentum can indeed strengthen into the second half of this year. We’re counting on the dissipation of trade related uncertainties such as U.S-China trade negotiations and USMCA which have been a major drag on the global economy in recent quarters.
The US dollar and the Federal Reserve
The trade-weighted dollar has now gained in three consecutive months. Economic data has been much better in the U.S compared to the rest of the advanced world and that likely benefited the trade-weighted greenback. In the most recent meeting, the Fed reaffirmed its ‘patient’ policy by holding rates steady amid persistently low inflation. The Fed Chair Jerome Powell warned that if inflation were to run persistently below their target for a sustained period of time, it would impact their policy decisions. However, if the Fed was serious about this claim a rate cut could occur even though economic growth is strong. The Fed realistically wouldn’t cut rates in a hurry unless the economy experiences a significant slowdown, as low inflation probably won’t force any cut rates until late 2019 at the earliest. With the Fed sidelined, the U.S. yield advantage is unlikely to rise much further from here and the USD could be vulnerable over the near medium term especially if the global economy bounces back.
The Canadian dollar and Bank of Canada
In the month of April the Canadian dollar suffered another loss against the USD, it has depreciated by roughly 2% over the last two months. The expectations for higher oil prices to boost the Canadian dollar were offset by worsening Canada-U.S interest rate spreads after the Bank of Canada chopped its 2019 Canadian GDP growth forecast by half a percentage point to a measly 1.2% in its latest monetary policy report. While the Bank of Canada has said that the slowdown is temporary in nature, they don’t expect a meaningful rebound until the second half of 2019. If the Canadian economy recovers, markets will reconsider their expectations of a rate cut this year and possibly give a lift to the Canadian dollar. As speculators continued to hold net short positions on the Canadian dollar through 58 consecutive weeks, any appreciation could potentially be amplified by the reversal of speculative net short positions on the currency.
The uptrend for Crude oil prices since December 2018 has snapped even though Venezuela serves as a positive catalyst. Recent changes in trader positioning from long to short suggests near-term weakness in oil prices which will likely generate more USD/CAD strength. Inventory data showed that U.S Crude oil stockpiles have risen to their highest level since September 2017, while at the same time U.S production hit an all-time record high at 12.3 million barrels per day. Additionally, OPEC (including Russia) has communicated to increase production by 1.4 million barrels per day to offset the impact of Iran and prepare for the commuter-heavy summer season. There has been supply concerns lingering since Donald Trump’s administration made their decision to end waivers with countries importing Iranian oil – their strategy intending to eliminate Iran’s oil export altogether. For oil prices, the timing of these supply developments couldn’t be worse.
FX Forecast Table May 2019
||2019 – Quarter 3 (USD/CAD)
||2019– Quarter 4 (USD/CAD)
|Royal Bank of Canada
|Bank of Montreal
|Canadian Imperial Bank of Commerce
|Toronto Dominion Bank
*Figures based on previous month
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