April 2022: FX Outlook

Economic Outlook and Summary

War and interest rates were the focus in March, and that won’t change in April. The EU, USA, and the rest of the G-10 governments have levied a slew of sanctions on Russian businesses, politicians, and oligarchs. The sanctions may have inconvenienced Russia, but they haven’t done anything to halt the Russian invasion of Ukraine. That’s because the EU has not banned Russian oil and gas imports, which plays a huge role in funding the hostilities. Germany refuses to embargo Russian energy as it would seriously damage its economy.

The Fed kicked off the new tightening cycle with a 0.25% rate hike on March 16. The news didn’t surprise anyone, but the Summary of Economic Projections (SEP) dot-plot forecast raised a few eyebrows. The FOMC signaled that another six rate hikes were in the pipeline.

The Bank of Canada (BoC), and European Central Bank (ECB), monetary policy meetings occur April 13 and 14th, respectively. Analysts anticipate a 0.50% rate hike from the BoC and a hawkish pivot from the ECB.

China is experiencing another COVID-19 outbreak. President Xi Jinping and his administration have a “zero-tolerance” policy, resulting in Shanghai being fully locked down. If the virus and lock-down measures impact other cities, risk sentiment will sour over fears of new supply chain disruptions, stoking global inflation.

The USD and Federal Reserve

The Fed has pivoted to a hawkish bias. They are spooked by soaring inflation and admitted that they failed to foresee the persistence of supply-chain disruptions on prices. Many Fed officials are now suggesting the FOMC needs to raise interest rates by 0.50% as soon as the May 4 meeting. On April 3, San Francisco Fed President Mary Daly said, “The case for 50, barring any negative surprise between now and the next meeting, has grown.”  New York Fed President John Williams said high inflation was the Fed’s greatest challenge but believes a combination of rate hikes and balance sheet reduction will drive inflation lower. Goldman Sachs and JPMorgan are two of several major banks predicting two 0.50% rate hikes at the May and June FOMC meetings.

The FOMC minutes are released on April 6. They are likely to reflect the Fed’s hawkish bias, but should not impact markets due to the more recent comments from officials.

The Canadian Dollar and Bank of Canada

The Canadian dollar started April with a bullish bias.  USDCAD closed February 28 at 1.2758 (CAD 78.32) and closed March 31 at 1.2507 (CAD 79.96 cents = $1.00 USD).

The trend is likely to continue in April, although there will be plenty of up and down moves.  S&P 500 price action is a major driver of the Canadian dollar as that stock index is viewed as a barometer for risk sentiment.

The S&P 500 has sharply from its March 8 low, triggered by a spike in WTI oil prices to $128.30.  At the time traders feared an economic slowdown if the world sanctioned Russian oil, but it didn’t happen, and the S&P 500 climbed 10% (as of April 4, 2022).

The Canadian dollar benefits from rising odds that the Bank of Canada will be more aggressive at its April 13 monetary policy meeting.  The BoC Survey of Consumer Expectations saw a jump in inflation, with consumers now seeing prices rising to 5.1% (from 4.6%).  However, they do anticipate inflation will return to the 2.0% area in a couple of years.  The BoC will want to ensure inflation retreats by hiking interest rates 0.50%, and leaving the door open to a follow-up move in June.

The prospect that Canadian interest rates normalize quicker than expected combined with steady to firm oil prices suggests that USDCAD will trade with a negative bias, in a 1.2220-1.2590 range in April.  If the S&P 500 index tumbles below the March low, all bets are off.

Oil Prices

Oil prices retreated sharply from their Russian invasion peak but remain at elevated levels compared to the past. West Texas Intermediate (WTI) remains in its 2022 uptrend while price are above $96.50/barrel. Hopes that the ongoing post-pandemic recovery combined with crude supply disruptions from Russia, and Opec’s failure to adjust production quotas will underpin prices. However, gains may be capped in the $110.00/b area due to the risk of reduced global demand if the Shanghai Covid-19 outbreak expands globally.

Forecast Table 

*Forecast is based on last month.  Forecast Table is for mid-market rates, and subject to change anytime.