Murky Outlook for Loonie – Canadian Dollar Outlook March 2015
Canadian Dollar Outlook March 2015
The USD/CAD has been trading in a range between 1.27 and 1.23 seemingly quite content and looking for direction. For the most part, the US dollar has had broad based strength on the back of growing US economy and strong labor market. The Canadian dollar is under pressure from an uncertain economic environment due to the fallout of oil prices and the Bank of Canada’s cautious nature on interest rates. Expect the US dollar to continue to strengthen as the US Federal Reserve raises interest rates in the latter half of the year.
The Canadian dollar bears are hoping the Canadian economy reports poor GDP and jobs data in Q1 and Q2 due to falling oil prices and weaker consumer confidence. This could cause the Bank of Canada to cut interest rates again at some point, especially if oil falls below $40/bbl.
Canadian dollar bulls are hoping for oil prices to rebound. This is the biggest momentum swinger for the Canadian dollar – it’s all about oil prices. Not only would this improve the labor market, the economy, but it will also ensure the Bank of Canada is back to a neutral stance on interest rates. Rising oil prices would help Canadian dollar bulls immensely.
Overall, the US dollar is strong and has momentum and strengthening consumer confidence and lower oil prices will help the US consumer. The US labor market unemployment rate is near a 6.5 year low. In Canada, oil price uncertainty is impacting the Bank of Canada and consumer confidence. It is a tale of two worlds.
Look for the USD/CAD to continue to be rangebound but the US dollar to gain strength as the US moves closer to raising interest rates and this would move USD/CAD closer to 1.30.
Bank of Canada and Oil Prices
The Bank of Canada cut interest rates and shocked the markets earlier this year. In its most recent policy update in the beginning of March, the Bank of Canada had a much more neutral tone and seemed to be in a wait and see approach.
Earlier in the year, the Bank of Canada had assumed $60 oil in the “medium term” and while oil prices are hovering near $50/bbl, below the Bank of Canada’s target, the oil prices could be considered close enough to the Bank of Canada’s target for them to stand pat and not do anything with interest rates.
Nevertheless, if oil prices do fall again, back to near the $40/bbl level, another rate cut in Canada could be expected and this would be a big negative for the Canadian dollar. While the US Federal Reserve is in rate hike mode, the Bank of Canada has created uncertainty with respect to its next move, and many expect a 40% change that another interest rate cut could occur by the end of 2015.
The Bank of Canada prefers a lower Canadian dollar as this would boost the export sectors in Canada such as manufacturing. While it takes some time to take effect, exports should benefit and contribute more to Canada’s economy with a lower Canadian dollar.
US Dollar and Federal Reserve
The US dollar has had broad based momentum vs. a range of currencies due to the strong US economy, risk aversion, safe haven status, and stability. The US Federal Reserve has not commented on the strength of the US dollar and the US economy has yet to be significantly impacted by the strong US dollar.
It is not a question of if but when the US Federal Reserve will hike interest rates in 2015. This factor alone will provide a strong push for the US dollar to continue to strengthen in the latter half of this year. While most global economies are adding stimulus and cutting interest rates, the US is doing the opposite and this is attracting flows of funds in to the US dollar.
Any hint of rising inflation risks would quicken the pace of US interest rate hikes and further stimulate the US dollar move higher.
Canadian Dollar and Economy
The Canadian was rangebound in February bouncing up and down but relatively stable compared to January which had an almost 10% drop. The Canadian dollar continues to be heavily influenced by the Bank of Canada interest rate outlook, oil prices, local economy.
The murky outlook for the Canadian economy due to falling oil prices has created a level of uncertainty and the full extent of the blow to the Canadian economy is unknown. This is precisely the reason the Bank of Canada acted preemptively to cut interest rates.
When the labor market and GDP data in Canada remain stable for a quarter or two, this will provide some confidence to Canadian dollar bulls. While the most recent GDP data in Canada was positive, Q1 and Q2 data will fully reflect the oil price meltdown. The divergent Canadian and US economy is a negative for the Canadian dollar.
Greece and the Eurozone
While the Greece issue is now in the backdrop, Eurozone issues remain. Growth is weak and the ECB is in stimulus mode to boost the eurozone economies. The Greece uncertainty could reemerge in about four months. While some flows should occur from Europe to Canada and this should be a benefit to the Canadian dollar. The Eurozone like Canada is in stimulus mode. Both currencies should face pressure from the US dollar.