Canadian Dollar Forecast – March 2016

Canadian Dollar 2016

The US dollar has been all over the place in February, currently sitting at a low of 1.34 USD/CAD. However, the US dollar is expected to regain some strength in the remainder of the year as monetary policy tightening from the Federal Reserve is expected to continue this year. Furthermore, the US economy has produced relatively good data and GDP growth has continued to show continued progress evident in an upward revision of Q4 GDP growth. Continued monitoring of US economic conditions and monetary policy will cast light on the direction of the US dollar going forward.

Canadian Dollar Trend

The Canadian dollar had one of its best months in recent memory due to bottom support in the Oil price decline and with the Bank of Canada turning to fiscal policy rather than further monetary policy easing. It is expected that fiscal policy will support growth and diversify reliance on growth driven by monetary policy and export sector competitiveness. This strategy shows promise as imported food costs have begun to drag down on increased export sector growth. Overall, monetary policy decisions and changes in the Canadian economic picture will be the main determinants of Canadian dollar strength.

Canadian dollar bears have had a bit of a rough patch in February due to the strong Canadian dollar rally from the highs of 1.47 USD/CAD witnessed in January. This has been due to stabilization in the bottoming of oil prices and a shift in stance by the Bank of Canada away from monetary policy and towards fiscal policy to drive economic growth. However, the unfavourable direction is not expected to continue with banks projecting resurgence to USD/CAD rates at the 1.37 range by the end of Q1 and as high as 1.40 by year end.  It is important to note that with March being an event heavy month with regards to economic data; there may be increased volatility and perhaps an overall change in underlying fundamentals should the Canadian economy surprise. It will be important to closely monitor economic data and any shifts in stance by the Bank of Canada to confirm the direction of the Canadian dollar.

Canadian dollar bulls have had a nice change of tune with rates sitting at the highest points in recent memory. However, with the US economy continuing to push out favourable economic data and with expected monetary tightening by the Federal Reserve, the USD/CAD pair is expected to rise again by the end of Q1 and perhaps even more so by year end. As mentioned above, March is an event heavy month with regards to economic data releases and increased volatility can be expected. It will be prudent to follow oil prices, monetary policy, and economic data out of the US and Canada to gain insight into the direction of the Canadian dollar.

Summary

For the coming months, the US dollar and Canadian dollar pair is expected to rise again with projections set around 1.37-1.40 USD/CAD.

Oil Prices

Oil prices for the near to medium term future have seemed to find a bottom and are sitting at roughly $35. Demand and supply dynamics continue to be the main driver of oil prices and continued reduction in supply will be the main determinant should oil prices rise in the near future. For more information on oil prices, please take a look at our article on the impact of low oil prices on the Canadian dollar.

Canadian Economy and Bank of Canada

The Canadian economy grew by only 1.25% in 2015 mainly due to weak commodity prices affecting the mining and oil and gas sector. A positive tone in the Canadian economy continues to sustained moderate growth in the labour market and improving performance in the services and construction sectors.  This is expected to be boosted by increased federal expenditure and continued strength in the auto sector. Similar to last month, weak consumer confidence and high household debt will likely result in little support for the Canadian economy from consumer spending.

With regards to monetary policy, the Bank of Canada has taken a step back from easing monetary policy further and has shifted towards fiscal stimulus and will wait on the results of that before moving forward. It is expected that the Bank of Canada will hold its policy rate level at 50 basis points. Headline inflation and core inflation both currently sit at 2% with a large driver being due to rising food import costs.

US Economy and Federal Reserve

The US economy is showing moderate growth at around 2%. US economic indicators remain strong with consumer spending, housing activity, labour market, construction, services, and other sectors all showing signs of continued expansion. A continued area of weakness for the US economy continues to be the industrial, manufacturing, and export sector due to the strong US dollar.

With regards to the Federal Reserve, rates are expected to increase to 100 basis points in 2016. However, the Federal Reserve has shifted to a more cautious “wait and see” stance which is a steep contrast from the aggressive 3-4 hikes forecasted in December 2015. Currently, core inflation has hit a high of 3.25% with headline inflation slightly above 1%.

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.