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July 2020: FX Outlook

Economic Outlook and Summary

The Federal Reserve interest rate currently stands at 0-0.25%, with a neutral rate announcement expected at the end of the month. Equity markets continue to surge, and the job market posts gains significantly above expectation for the month of June. Despite this positivity, pessimism grows surrounding the decreasing likelihood of a v-shape recovery. The bearish outlook is a result of worsening tensions between China and the USA, and a large resurgence of coronavirus cases in some states. Major banks are preparing for a dismal recovery by setting aside $28 billion to cover loans expected to default in the coming months.

The USDCAD has experienced recent stability, currently trading in the 1.35 range, after bouncing up from lows of 1.33 in June. The Bank of Canada issued a neutral stance in its most recent interest rate announcement, due to economic uncertainty and an expected GDP decline of 7.8% for 2020. Despite the dismal outlook, the job market has shown signs of recovery as 953,000 jobs were added in June, far exceeding previous expectations. The short-term performance of the loonie may rely upon oil prices as OPEC convenes this week to discuss expanding oil output, potentially pushing the loonie down. Going forward, the USDCAD is expected to move within the 1.36 range through the third quarter of 2020.

The US Dollar and Federal Reserve

The Federal funds rate remains at 0-0.25%, with a rate announcement expected at the end of the month. Equity markets have surged in the last month, with positive economic data shattering previous estimates. With the US economy adding 4.8 million jobs in June, the depreciation of the USD seems to be lagging. This continued strength in the USD is likely attributed to the resurgence of coronavirus in many countries, diminishing analyst expectations of a v-shaped recovery. Additional uncertainty surrounding tensions with China have added to volatility of the USD as Trump suggests that a Phase 2 trade deal is unlikely at this point. With these sustained factors, the economy is likely to endure an elongated recovery, an outlook shared by major banks as they set aside $28 billion to manage defaults in the coming months.

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The Canadian Dollar and Bank of Canada

Despite reaching lows of 1.33 in June, the USDCAD has returned above its 200-day moving average. Movement in the dollar can be attributed to a credit rating downgrade by Fitch for the Government of Canada, which went from AAA to AA+. Additionally, the dollar has been affected by weaker oil demand as cases of coronavirus resurface in many economies, resulting in lockdowns that have dampened the outlook for oil prices. Despite the current demand shortage, OPEC has suggested a positive outlook for oil prices as they plan to pull back on supply cuts in anticipation of increasing demand in the coming months. If correct, the loonie is expected to post near-term losses with a recovery in the mid-term.

The Bank of Canada held the overnight rate at 0-0.25%, as it expects a slower recovery and GDP decline of 7.8% for 2020. The economy added 953,000 jobs in June, exceeding the 700,000 predicted by analysts, as businesses reopened in many parts of the country. With many provinces moving towards a full reopening in July, the job market is expected to post significant gains in the near-term.

Forecast Table 

Bank 2020 – Quarter 3 (USD/CAD) 2020 – Quarter 4 (USD/CAD)
Scotiabank* 1.34 1.32
BMO 1.35 1.35
CIBC 1.39 1.38
TD Bank* 1.37 1.36
National Bank 1.38 1.36

*Forecast based on previous month

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By KBFX | July 16, 2020 | Monthly Canadian Dollar Outlook/Forecast | 0 comments