Canadian Dollar Forecast July 2018

Economic Outlook and Summary

The month of June showed the Canadian Dollar and economy continue its slide downward as the month began with Canadian employment figures showing a drop of 7.5K jobs in comparison to its expectation of a 17.5K gain, resulting in the unemployment rate staying steady at 5.8%. These statistics showed to be consistent with the tight labor market as The Bank of Canada (BOC) is trying to maintain a GDP level above 2% and stay consistent with a rate hike increase for July as they stay firm on their hawkish tone. Through the month of June the Canadian dollar saw its downward trend continue with US-Canada trade ties deteriorate as U.S. President Donald Trump had a few words for the Canadian Prime Minister Justin Trudeau in terms of the current trade situation as fears of tariffs loomed. Concerns with NAFTA have also leaned on the downward pressure of the Canadian economy as negotiations have still been very unclear to whether there will be a potential trade agreement in the near future. The month of June saw the loonie hit a 1-year low as US-Canadian yield spreads widened, giving support to its rival greenback currency. The end of the month saw the Canadian economy show some relief as oil prices continued their rally.

The US economy started the month of June off on upward trend as US economic data showed the consumer price index rising by 0.2%. In the month of June the Federal Reserve Bank decided to raise the current fed funds target rate within the range of 1.75-2% as the central bank is staying firm on its hawkish tone for its current monetary policy. The month of June also saw the conclusion of the G7 summit of the top developed economies in which U.S. President Donald Trump reinforced his tight protectionist stance on trade tariffs as other G7 leaders tried to convince him otherwise in keeping a hold on any possible tariffs from the U.S. This protectionist stance has led to the United States showing signs of entering a trade war with China and each of whom are ready to retaliate at one another as the month of June has come to an end.

Recent data being released by major Canadian Financial institutions has indicated a mixed expectation of the Canadian economy. However, US strength has been substantial over the past month. 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 with much uncertainty still surrounding NAFTA and other trade agreements playing a key role in the direction of the future economic outlook.

The Canadian Dollar and Bank of Canada

After expectations of the USD/CAD rate to move towards 1.20 this summer have diminished the Bank of Canada has been more cautious in its monetary policy strategies. The clouded trade relationship between the US and Canada has left the outlook for NAFTA uncertain and has weakened the Canadian dollar. The expectations are that a deal will be reached, and the Canadian dollar will recover eventually. A strong Canadian labour market is driving wages and prices higher which will allow the Bank of Canada to adjust interest rates higher in the coming months. This should allow the short-term rate spreads of the USD/CAD to end the year at 1.28.

The USD and the Federal Reserve

The US dollar continued its momentum throughout the month of June as the dollar benefited from tighter fed policy and safe haven flows. It’s projected that four hikes could take place by the time 2018 ends as fed policy makers are leaning towards stricter policy tightening. This would keep the USD running strong in the near term. However, anticipated long-term risks suggest that come 2019 the US dollar could weaken due to fiscal imbalances and secular pressures. This all comes at a time where the world is nearing a trade war with the European Union, Canada and China set to respond to the latest US trade barriers in July which brings forward much uncertainty in terms of trade flows.

Oil Prices

Oil prices started the month on a weaker foot at levels around $65 but saw a strong rally though the month. This rally was associated with some of the remarks made by Saudi Arabia’s Oil Minister made remarks to oil production increases. Reports showed that OPEC had agreed to increasing oil supply by around 1 million barrels per day, as early as next month in their Summit meeting in Vienna last month. However, OPEC stated the current agreement will continue to the end of 2018. Currently the price of WTI is sitting at around a low $74 level, however the US has been putting pressure on OPEC to try and reduce prices which may cause some volatility in the short-term. As oil prices continue to rise it may result in a boost for the commodity linked Loonie.

FX Forecast Table July 2018

*Figures based on previous month

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