Economic Outlook and Summary
War and interest rates will be the focus in March. The Russian invasion of Ukraine and the G-20 countries’ reaction to the outrage will continue to dominate global risk sentiment. Even so, traders will be keeping a sharp look-out for Central bank reactions to soaring inflation rates with key meetings from the European Central Bank, March 10, the US Fed, March 16, and the Bank of England, March 17. Oil prices will be another catalyst due to the inflationary impact of the 52% increase in West Texas Intermediate (WTI) since the start of the year.
The USD and Federal Reserve
The US dollar, as measured by the US dollar index (USDX), will continue to grind higher in March due to safe-haven demand for US dollars and the outlook for US interest rates. The US economy is robust and that won’t change in March. However, inflation is well above the Fed’s target and not likely to decline any time soon. Fed Chair Jerome Powell testified before Congress on March 2 and all but confirmed a rate hike on March 16. He also said he expects inflation to decline over the course of the year. The usual mix of top-tier economic data will have limited if any impact on trading if the Russia and Ukraine war continues.
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The Canadian Dollar and Bank of Canada
The Canadian dollar will continue to bounce between demand from rising oil and other commodity prices and selling pressure from the ebbs and flows of global risk sentiment. On March 2, the Bank of Canada raised the overnight rate by 0.25% as expected. The Canadian dollar did not benefit much from the move partly because the Fed will match it on March 16. However, if the FOMC meeting concludes with a dovish bias, that may change. Many analysts are forecasting that the BoC will hike rates five more times in 2022, but if the Fed forecast’s a slower pace of rate increases, the Canadian dollar may rally. USDCAD is expected to trade in a 1.2450-1.2850 in March.
Oil Prices
Oil prices will be the straw that stirs the inflation drink. West Texas Intermediate soared in the first two days of March, and prices will remain elevated until the geopolitical crisis is resolved. The rally is fueled by fears that Russian oil shipments will be disrupted or banned by G-20 nations. Opec is not planning to take steps to ease the supply concerns. The cartel enjoys windfall gains from the Russian invasion and refuses to raise their previously scheduled April increase of 400,000 barrels/day. It is probably no coincidence that the production levels were left unchanged as Russia’s Deputy Prime Minister Alexander Novak is co-chair of Opec-Plus.
Forecast Table
| Bank | 2022-USD/CAD Q2 | 2022-USD/CAD Q3 |
| Scotiabank* | 1.21* | 1.20* |
| Bank of Montreal | 1.28 | 1.27 |
| CIBC | 1.30 | 1.32 |
| TD Bank* | 1.25* | 1.24* |
| National Bank | 1.25 | 1.22 |
*Forecast is based on last month. Forecast Table is for mid-market rates, and subject to change anytime.
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