January 2021: FX Outlook
As COVID cases continue to rise globally, with many countries demonstrating second and third waves exceeding their initial outbreaks, vaccine producers have been scrambling to distribute as many doses as possible. This has left Canada with fewer-than-expected doses in the near-term, as vaccine producers reduce their output in order to meet longer-term demand. Currently, vaccines are anticipated to reach their expected rollout capacity in late March, coinciding with easing restrictions, with full voluntary vaccination to be reached in the fall.
An accelerated recovery is expected to coincide with vaccine rollouts in March and subsequent easing restrictions. The re-opening is expected to drive the recovery into the end of 2022, and possibly mid-2023. The rebound will be driven by reserved demand for goods and services that could be acquired through elevated cash balances—resulting from increased savings during the recession’s period of uncertainty. Furthermore, strong momentum in a number of industries should carry forward, as seen in the fourth quarter of 2020, where numerous industries were experiencing elevated levels of economic activity, despite being subject to numerous restrictions and limited operational capacity. Thus, a K-shaped recovery is expected to denote the economic rebound.
Equity markets have outperformed expectations, reaching all-time highs, as investors anticipate additional stimulus and vaccine rollouts to accelerate south of the border. Commodity and housing prices are also rebounding, with the housing demand curve accelerating beyond the supply curve, further bolstering prices across North America.
Fiscal support in Canada is expected to exceed $20 billion, and monetary policy is expected to remain expansionary into 2022, as above-target inflation is accepted in the near-term. The long-term yield curve reflects higher interest rates, which are in line with expected growth and inflationary pressures.
Canada’s GDP is expected to grow by 4.3% in 2021, despite near-term declines while the restrictions remain in place. The majority of the growth is expected to reflect in second quarter earnings as spending activity accelerates amidst initial easing of restrictions. In the US, looser restrictions are expected to promote a modest recovery in the first quarter, with similar acceleration in the second quarter, through the end of the year.
Currently, slow vaccine rollouts will present a headwind for the Canadian economy; however, with increasing availability and acceptance of vaccines, the economy can still experience a strong rebound. Increased spending will also contribute to the rebound, as consumers increase cash flow throughout the economy. Consequently, the USDCAD is expected to move within the 1.26 range throughout the first quarter.
Forecast Table
Bank |
2021 – Quarter 1 (USD/CAD) |
2021 – Quarter 2 (USD/CAD) |
Scotiabank* |
1.30 |
1.30 |
Bank of Montreal |
1.28 |
1.27 |
Canadian Imperial Bank of Commerce |
1.30 |
1.32 |
Toronto Dominion Bank* |
1.27 |
1.25 |
National Bank |
1.29 |
1.26 |
*Based on previous month. Forecast Table is for mid-market rates, and subject to change anytime.