Canadian Dollar Forecast April 2016

Canadian Dollar Forecast April 2016

March saw the US dollar continue to decline against most currencies, as global growth concerns continue to give the Fed pause in raising rates. Originally planning for 4 rate hikes in 2016, the Fed has since revised this projection downwards to 2 rate hikes, tempering expectations of what US economic growth will look like in 2016. However, the labour market remains extremely strong in the US, with both labour participation and unemployment figures looking positive. It appears that the US labour market will need to be cooled down sometime shortly, but the Fed would like to see inflation pick up towards the latter half of 2016 before additional policy tightening takes place. Economic growth is hovering around 2%, which is right within the confines of the Fed’s target.

The Canadian dollar has continued to rally against the US dollar over the past two months. Commodities are better supported, with oil showing stability above $35/barrel. The Canadian economy has also performed well in Q1 of 2016 based on early indications, which builds on a strong finish to the 2015 calendar year. A stimulus budget was announced by the new liberal government, which is expected to increase GDP 0.5% in both 2016 and 2017. This is expected to take some pressure off the BoC in the medium-term to keep the economy progressing, The range for the USD/CAD looks more promising, around 1.30, with economic data, commodity prices, and diverging monetary policy continuing to be the main story for the Canadian dollar.

Canadian dollar bears will hope that US inflation shows signs of heating up, putting pressure on the Fed to raise rates at a quicker pace. Global uncertainty will also be a boon to Canadian dollar bears, as CAD tends to be a risk-on currency, along with other commodity currencies. Commodities will continue to be a big factor for CAD, particularly oil prices, so Canadian dollar bears will be looking for oil prices to fall even further as a result of oversupply. Canadian data has been relatively strong thus far in 2016, but Canadian dollar bears will be looking to see continued pressure on the Canadian oil and gas industry, as well as the manufacturing sector, which could slow down a potential rebound.

Canadian dollar bulls have benefitted over the last two months, but will be looking for stronger fundamental improvement in the Canadian economy to advance their position. CAD’s recent rally has been largely fuelled by a re-alignment of US expectations, but strong oil has also been a contributor. For the Canadian dollar to gain momentum, an uptick in the Canadian economy is essential. The stimulus budget figures to help this cause beginning in 2017.

Summary

In the near-term, it’s expected that the USD/CAD continues to trade around the 1.30 mark. Many banks are beginning to revise their forecasts closer to an expected level of 1.30 by year end, from approximately 1.40 which was expected a few short months ago.

Oil Prices

Oil prices have been better supported above $35/barrel, even testing $40/barrel recently. Global supply remains a concern for OPEC, as oil is still heavily in oversupply. Even if measures are taken to freeze oil production at current levels, it would be of little help. Iraq has been exported higher than expected levels of oil, as they try to regain market share in the wake of export sanctions being lifted. The Bank of Canada will continue to monitor global developments pertaining to oil, as it heavily impacts the Canadian economy.

Canadian Economy and Bank of Canada

2015 was a difficult year for the Canadian economy, as GDP grew by a paltry 1.25% over the course of the year. Low commodity prices were the main culprit for 2015’s misfortunes, as a sharp decline in oil prices was witnessed, harming the Canadian oil & gas industry. Despite 2015’s difficulties, the Canadian labour market showed positive signs by adding jobs at a moderate pace. Canadians are likely to be cautious spenders in 2016, as a result of weak wage growth and soft consumer confidence. Throughout Q1 of 2016 the economy has been performing well, and the Bank of Canada is expected to revise expectations upwards for the early part of the year.

The Bank of Canada is widely expected to keep rates on hold for 2016, as they continue to assess the health of the Canadian economy. Stimulus in the form of fiscal policy is expected to result in an extra 0.5% GDP growth in 2017 and 2018, which should take some pressure off the Bank of Canada in respect to cutting rates to stimulate economic growth. Commodity prices will continue to be of focus, as we have seen the Bank of Canada react to material changes in oil prices, by both revising forecasts downwards and in more extreme cases, cutting rates.

U.S. Economy and Federal Reserve

The US economy had lost some momentum heading into the first quarter of this year, as GDP growth appears to be progressing at levels close to 2%y/y growth. The tapering in GDP growth raises some concerns regarding overall inflation, which the Fed will continue to assess before they make additional monetary policy decisions. Original expectations included four rate hikes in 2016, which has recently been revised downwards, with only 2 rate hikes anticipated. The Fed has cited “international considerations” as the reason for not raising rates more rapidly, which includes concerns surrounding global growth.

The US labour market continues to look strong, hovering around full employment. Inflation is steadily progressing, despite the difficulties associated with the strong USD. Core CPI hit a high of 2.3% y/y growth in February, but headline inflation remains lower, hovering around 1%. It’s likely the Fed lets inflation run a little hotter before they introduce additional tightening.