Canadian Dollar Forecast – February 2016

Canadian Exchange Rate Forecast 2016

January was a volatile month for the US dollar, reaching an apex of near 1.47 USD/CAD during the month. However, the strong USD rally has begun to subside, realigning with original expectations of around 1.40 USD/CAD. Supporting this has been the Federal Reserve expressing concern regarding 2016’s four proposed rate hikes, in the wake of market uncertainty and financial market losses. Overall, the US economic outlook remains positive with strong unemployment figures, relatively positive consumer confidence, and strong consumer spending. US dollar drivers for the time being, continue to be commodity prices, market developments in China, geopolitical tensions in the Middle East, and monetary policy effects on debt markets. Domestically, investors will need to monitor economic data and sustained momentum in US economic growth to support the US dollar.

Will the Canadian Dollar Rise in 2016?

The Canadian dollar will likely continue to under perform in the short to medium term, with resurgence in the Canadian dollar expected by years end. While the Bank of Canada has abstained from further lowering interest rates in 2016, confidence in the Canadian economy remains low. Consumer spending is expected to weaken due to low wage growth, poor consumer confidence, and increasing household debt. Furthermore, oil prices are expected to remain in the $30-$35 range, a detriment to the Canadian economy, particularly in Western Canada. Ultimately, the range for the USD/CAD remains at 1.37-1.39 for the year with economic data, commodity prices, and diverging monetary policy continuing to be the main story for the Canadian dollar.

Canadian dollar bears will need to pay closer attention to economic developments in Canada and the US. Of late, forecast beating data in international trade, jobs, whole sale trade, and manufacturing sales have buoyed the Canadian dollar. Pairing this with a hold on interest rates by the Bank of Canada and a shift from a hawkish to a dovish stance by the Fed has helped support the Canadian dollar. Relative monetary policy between the Bank of Canada and the Federal Reserve, economic data releases from the US and Canada, or material changes in commodity prices will drive any major changes in the USD/CAD pair for the short term.

Canadian dollar bulls appear to remain disappointed for the near term. While there has been data releases and monetary policy commentary coming out of the US and Canada that have aided the Canadian dollar, it will take some time and consistent results to facilitate a stronger Canadian dollar. Consistent results and further traction in Canada’s economic growth story will also fuel consumer confidence; however, the onus lies in oil prices rebounding in order to see significant changes in Canada’s economy and dollar.

Summary

For the coming months, the US dollar and Canadian dollar pair is expected to remain within targets set around 1.37-1.40 USD/CAD.

Oil Prices and the Canadian Dollar

Oil prices for the near to medium term future will likely remain in the $30-$35 per barrel range. The story has not changed as supply continues to massively outweigh demand as OPEC continues to produce oil with no sign of slowing down. Canada will need to continue to rely on export competitiveness and on the results of fiscal and monetary policy stimulus in order to drive Canadian economic growth. For more information on oil prices and the Canadian dollar, please read our article on the impact of low oil prices on the Canadian dollar.

Canadian Economy and the Bank of Canada

The Canadian economy experienced stagnant fourth quarter growth in 2015 at 1.25%, coupled with weak business investment, and tepid global demand. A bright spot in the Canadian economy has been sustained growth in the labour market, and improving performance in the services and construction sectors. Weakening consumer confidence and high household debt will likely result in little support for the Canadian economy from consumer spending. Overall, the Canadian economy will continue to rely on improvements in the manufacturing sector from increased competitiveness in the export sector. The Bank of Canada has elected not to institute further monetary policy easing. The Bank of Canada will want to assess the fiscal policy stimulus the Canadian government has promised to deliver, and will wait on the results of that package before moving forward. Headline inflation sits at slightly over 1% y/y and core inflation at just over 2% y/y. For more information on the Bank of Canada and the Canadian dollar, please read our article on the impact of the Canadian dollar if the Bank of Canada cuts interest rates.

US Economy and the Federal Reserve

The US economy lost momentum to end 2015. However, US economic indicators remain strong with consumer spending, housing activity, labour market, construction, services, and other sectors all showing signs of expansion. A continued area of weakness for the US economy will be the export sector due to the strong US dollar. Currently, core inflation sits at 2.1% y/y, with headline US inflation expected to realign with core inflation in 2016.

For comparisons, you can also take a look at our previous Canadian dollar forecast for January 2016.

Knightsbridge Foreign Exchange has based the opinions expressed herein on information generally available to the public. Knightsbridge Foreign Exchange makes no warranty concerning the accuracy of this information and specifically disclaims any liability for trading decisions based on the opinions expressed and information contained herein. Such information and opinions are for general information only and are not intended to present advice with respect to matters reviewed and commented upon.