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FX Monthly Outlook – May 2020

Economic Outlook and Summary

The Federal Reserve interest rate currently stands at 0-0.25%, with considerations of a negative interest rate as the effects of the coronavirus continue to weigh on the economy. The rates and forward policies follow a significant downturn in the markets, as COVID-19 continues to keep many non-essential services closed. The service industry in particular continues to suffer, as some analysts have predicted as many as one in four restaurants may close permanently if the second wave proves prominent. Despite this, investors are exhibiting slightly positive sentiments in response to the Federal Reserve’s willingness to provide the liquidity necessary to stimulate markets. Additionally, Jerome Powell indicated that the Federal Reserve will continue to work closely with the government to aid the economy, as they see necessary.

The USDCAD has declined since its earlier rally, after reaching nearly 1.45. The Bank of Canada issued a neutral stance in its most recent interest rate announcement, due to economic uncertainty and already low interest rates. The announcement comes as the government handles nearly two million jobs lost in the month of April, as it continues to provide relief for workers laid off, through extensions of the CERB and implementation of the CESB programs. Going forward, the USDCAD is expected to move within the 1.42 range through the second quarter of 2020.

The US Dollar and Federal Reserve

The Federal funds rate was maintained at 0-0.25% amidst concerns surrounding coronavirus and its effect on the economy. Uncertainty in the markets, as a result of the pandemic, has resulted in increased volatility with the Volatility Index holding at decade-high levels. Although markets remain turbulent, the USDCAD remains relatively stable with narrower fluctuations in the 1.40 range. The US, and global, economy is expected to recover in the mid-term; however, these will depend on the extent of the recurrence of COVID-19 cases as it returns for a second wave—as currently scene in China and South Korea, which had previously contained the spread.

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The Canadian Dollar and Bank of Canada

The USDCAD has stabilized from the significant volatility seen towards the end of the first quarter. The support and stability of the Loonie may be the result of steadying oil prices, and containment of the virus, as many provinces look towards reopening their economies this week. The Loonie may find further support if current conditions further deteriorate in Russia, slowing their oil supply, providing support to oil prices and the CAD. However, given the Loonie’s correlation to oil prices, the CAD may face greater resistance in returning to values seen earlier this year.

Furthermore, the Bank of Canada maintains its neutral stance, holding the overnight rate steady at 0-0.25%. The economy is currently experiencing a contraction, with nearly two million jobs lost in April, following the one million lost in March.

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By KBFX | May 15, 2020 | Monthly Canadian Dollar Outlook/Forecast | 0 comments