June 2020: FX Outlook
Economic Outlook and Summary
The Federal Reserve interest rate currently stands at 0-0.25%, with suggestions of a neutral stance into 2023. Although retail investors seemed bullish as they rushed to take advantage of the markets, rising concerns over the potential of a second wave and an extended recovery has resulted in deteriorating sentiments. The White House’s call to keep businesses open has also sparked concern amongst health experts and state governors, as they consider further stay-at-home orders to impede the resurgence of a second wave.
The USDCAD has experienced recent volatility, currently trading at 1.3583, up from earlier last week when it traded in the 1.33 range. 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 from the month of April, as it continues to provide relief for workers laid off, through extensions of the CERB and CESB programs. However, May’s job report may indicate a recovery in progress as 10% of those jobs lost were recovered. Further commitment to extended OPEC cuts will also likely provide support for the Loonie. 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 was maintained at 0-0.25% as Powell indicates that rates are not expected to increase until 2023, in the Fed’s latest announcement. The markets saw a significant rebound in the recent month as retail investors rushed to take advantage of inflated dividends and seemingly discounted prices. Despite the climb, experts are warning of an imminent second wave as states are recording the largest intraday coronavirus increases since May 1st. Some states are even considering reinstating stay-at-home orders, despite the White House’s call to remain open at all costs. The USDCAD has since increased, trading in the 1.36 range, as the USA, Canada, and other global economies attempt to move towards normal output. As previously seen, if a second wave resurfaces, individuals can expect a resurgence in the USD as investors rush to convert their funds into USD, further increasing the USDCAD.
The Canadian Dollar and Bank of Canada
The USDCAD currently trades at levels significantly lower than the first quarter, as oil futures recover from momentary negative values seen earlier. Strength in the Loonie can be attributed to effective OPEC cuts bringing stability to oil prices, and less aggressive quantitative easing than is being seen in the USA. Despite this, Canada faces the risk of losing its AAA rating, depending on the Federal government’s ability to balance its finances. Consumer deleveraging may also force the Bank of Canada to increase quantitative easing, depreciating the CAD.
Furthermore, the Bank of Canada maintains its neutral stance, holding the overnight rate steady at 0-0.25%. The economy added 290,000 jobs for the month of May, recovering nearly 10% of the jobs lost since the economy was struck by plummeting oil prices and coronavirus in March.
|2020 – Quarter 3 (USD/CAD)
||2020 – Quarter 4 (USD/CAD)
|Bank of Montreal
|Canadian Imperial Bank of Commerce
|Toronto Dominion Bank*
*Forecast based on previous month