Canadian Dollar Update September 11, 2018
Economic Outlook and Summary:
Over the month of August the Canadian Dollar and economy lost pace slightly, as economic uncertainty with NAFTA hit a high and commodity prices weakened. The Bank of Canada (BOC) made the decision to keep its interest rates unchanged, which was a factor into the market conditions for the Canadian Economy over the past month. The Canadian Economy however did show strong economic data of GDP growth in Q2 of 2.9% annualized, and July’s inflation rate climbing to a level of 3%. Uncertainty with NAFTA continuously puts downward pressure on the Canadian loonie and economy, as negotiations are still unclear to whether there will be a potential trade agreement soon. However they have stated they will continue talks with the Canadian government in order to strike a deal and provide a more distinct economic forecast. If negotiations become clear this will result in the appreciation of the Canadian dollar and economic outlook.
The U.S economy and dollar rose through the month of August as the Federal Reserve Bank was staying firm on tightening its monetary policy and was boosted by higher expectations of a higher Fed funds rate this year alongside with some concerns surrounding emerging markets. Concerns surrounding both Canada and the U.S about NAFTA as mentioned earlier have had a toll on the volatility of the U.S dollar and markets and have benefited the U.S. up until this point, as talks are continuing to try and strike a deal with Canada as well. The U.S. has also stayed on their protectionist stance over the past month as they would like to deteriorate their current trade deficit and are expected to continue hitting the Chinese with additional tariffs. Inflation figures have hit a high of 2% leading the Federal Reserve Bank to keep its hawkish tone as current monetary tightening policy is likely to raise interest rates in the near term.
Recent data releases by major Canadian Financial Institutions has indicated an improved outlook of the Canadian economy compared to the previous month. However, US strength has been substantial over the past couple months, with labour and employment figures leading the way. Most of these institutions have updated their figures as it may be seen in the chart below, reflecting in a moderate change, and showing potential economic stability in the Canadian economy as NAFTA concerns can become clearer.
The Canadian Dollar and Bank of Canada:
The Canadian dollar lost a lot of ground in the month of August. We see the loonie decrease in value despite positive economic data in Q2. Expect the Bank of Canada to continue monetary policy tightening. With the feds also looking to hike interest rates, Canada-US interest rate spreads are unlikely to improve. However, the loonie could appreciate if ongoing negotiations lead to a new trade deal with the US. If trade related uncertainties and tensions are cleared, then this would help the economic outlook. This would increase the odds of policy tightening by the Bank of Canada and improve the Canada-US interest rate spreads and allow for stronger consistency with the loonie.
The USD and The Federal Reserve:
The US dollar is set to maintain its strength over the next term based on emerging markets and tighter monetary policy by the federal reserve. We did see in the month of August that the US dollar rose again against most major currencies by higher market expectations. Positive economic data have factored significantly in to the US dollars value. The greenback will also continue to benefit over the near term from monetary policy divergence. With employment rates remaining strong and inflation hitting its 2% target, the federal reserve is set to raise interest rates at least once before the end of 2018. If the USD can maintain momentum long term it would have to overcome all the trade tensions with NAFTA and uncertainty with the budget deficit and fiscal stimulus.
Oil prices started the month of August losing momentum as it was sitting at a WTI level of around $68, these have been a result of direct pump in production directly from OPEC producers. This past month has caused major volatility in the commodity with Chinese slowdown fears and the impact of the Turkish currency on emerging markets. Currently the price of WTI is sitting around a high $67 level as it did hit the end of the month on a downward projection with news relating to Saudi Arabia threatening to raise production to offset the sanctions placed on Iran by the U.S. a few months ago. We can continue to watch the price of oil as continual rises will result in a boost for the commodity linked Canadian loonie.
FX Forecast Table September 2018
||2019 – Quarter 1 (USD/CAD)
||2019– Quarter 2 (USD/CAD)
|Royal Bank of Canada
|Bank of Montreal
|Canadian Imperial Bank of Commerce
|Toronto Dominion Bank
*Figures based on previous month