September 2020: FX Outlook
Economic Outlook and Summary
Interest rates remain flat within the 0-0.25% range as Chair Jerome Powell reiterates the Federal Reserve’s plans to hold interest rates until 2023. Despite largely recovering to pre-pandemic levels in early September, equity markets have pulled back due to risk-averse sentiments and investors are beginning to question the valuations of tech companies that had largely led the recent rally. Additionally, recent reports suggest a gloomy outlook for the US economy as national debt is expected to double GDP by 2050; however, since forecasts were based largely under the conditions of an economic recovery plan, congress has been credited with ample opportunity to circumvent these concerns. Unemployment rates also decreased by 1.8 percentage points as the economy continues to add jobs, bringing unemployment to 8.4 percent. Sustained lending and government spending have largely contributed to the recovery, with Powell and Mnuchin stressing the importance of continued government spending.
The USDCAD has rallied since its early-September lows as market volatility increases and investors consider preparing for a second wave. The Bank of Canada maintained a neutral stance, holding the overnight rate at 0.25% due to economic uncertainty and concerns surrounding a recent spike in coronavirus cases. Employment continues to rise as Canada posts the addition of 246,000 jobs in August, largely fueled by full-time work. Going forward, the USDCAD is expected to move within the 1.33 range through the fourth quarter of 2020.
The US Dollar and Federal Reserve
The Federal funds rate remains at 0-0.25%, with a commitment to hold rates at near-zero levels until 2023. Fed Chair Powell continues to encourage lawmakers to increase and sustain government spending as he notes its success in stemming a stronger-than-expected recovery through the third quarter. The US economy added 1.4 million jobs in August, bringing unemployment down to 8.4 percent and increasing consumer spending by 0.6%. Despite reaching pre-pandemic levels in early September, major indices have pulled back and the CBOE volatility index remains relatively high amidst increasing concerns of a second wave. Further concerns surrounding the economy’s increasing debt have surfaced as the Congressional Budget Office reported in a recent forecast that US debt could double GDP by 2050, a figure that would put considerable stress on the greenback. Currently, the USD climbs as investors adopt a risk-off sentiment and global markets demonstrate uncertainty surrounding an increasingly plausible second wave of the virus.
The Canadian Dollar and Bank of Canada
The Canadian dollar has recently pulled back amidst broader economic concerns, despite conditions remaining relatively stable for the Canadian economy. The Bank of Canada maintains its neutral stance with Tiff Macklem indicating support for above-target inflation until a 2% inflation rate is deemed sustainable. Canada also added 246,000 jobs in August, increasing employment by 1.4% and bringing it within 1.1 million of its February levels, prior to the pandemic. Additionally, a recent draw of 9.517 million barrels shattered estimates of 1.271 million barrels, bolstering oil prices and providing the necessary support for the loonie.
The Bank of Canada overnight rate remains at 0-0.25% with a neutral outlook going forward as it grows tolerant of above-target inflation in support of attaining a sustainable 2% inflation rate. The dovish tone adopted by the Bank of Canada reflects the Federal Reserve’s approach to supporting the economy by making lending more affordable and promoting government spending.
Forecast Table
Bank |
2020 Q4 (USD/CAD) |
2021 Q1 (USD/CAD) |
Scotiabank* |
1.32 |
1.30 |
BMO |
1.32 |
1.32 |
CIBC |
1.30 |
1.32 |
TD |
1.30 |
1.28 |
National Bank |
1.36 |
1.34 |
*Forecast based on previous month