November 2020: FX Outlook
Economic Outlook and Summary
Markets have continued to surge following the elections as investors move towards riskier assets in anticipation of little policy change, due to expected gridlock in the senate. The USDCAD continues to trade at relatively lower levels amidst skyrocketing coronavirus cases throughout the US and political tensions as Trump refuses to concede. Equity markets continue to outperform, despite banks continuing their plans to reduce workforce. Unemployment rates dropped to 7.7%, adding 638,000 jobs as it continues its trend of exceeding consensus estimates.
The USDCAD continues to rally as Canada posts positive employment numbers, and investors adopt risk-on sentiment ahead of quantitative easing policies expected to shift focus towards helping households and businesses. The Bank of Canada remained relatively silent, holding the overnight rate at 0.25% due to economic uncertainty and concerns surrounding record coronavirus cases in many provinces leading to increasing restrictions. Although at a much slower pace, employment continues to rise as Canada adds 84,000 jobs. Going forward, the USDCAD is expected to move within the 1.32 range in the near term.
The US Dollar and Federal Reserve
The Federal Reserve’s rates remain at 0-0.25%, with no signs of change for the near future as the country continues to deal with the coronavirus. Fed Chair Powell has indicated that the vaccines promised by Moderna and Pfizer may not be sufficiently close enough to support the economy; therefore, he suggests that near term stimulus, noteably “direct fiscal support”, is needed to sustain the economy until the vaccines become available. The US economy added 638,000 jobs in October, bringing unemployment down to 6.9 percent, surpassing Dow Jones’ estimates of 580,000 jobs and unemployment of 7.7%. Currently, the USD has pulled back following the elections where investors are anticipating gridlock in the senate, inhibiting the President-elect’s proposed stimulus plan and corporate tax changes.
The Canadian Dollar and Bank of Canada
The Canadian dollar has posted consistent gains over recent months amidst a controlled coronavirus spread, relative to other major economies, and stable employment recovery. Despite this, recent employment gains have been dampened as Canada added 84,000 jobs in October, bringing unemployment down to 8.9% from 9.0%. The slower job growth is attributed to record coronavirus cases being reported in several provinces, with some provinces increasing restrictions to prevent further spread.
The Bank of Canada overnight rate remains at 0.25% as it reconsiders its current quantitative easy strategy. The BoC has announced its intentions to focus on longer-term bonds, which have more influence on the borrowing rates available to businesses and households. Going forward, OPEC has indicated that supply cuts will continue throughout the first quarter of 2021 as the virus continues to impact demand. Consequently, the USDCAD is expected to fluctuate within the 1.32 range going forward.
||2020 Q4 (USD/CAD)
||2021 Q1 (USD/CAD)
*Based on previous month. Forecast Table is for mid-market rates, and subject to change anytime