Canadian Dollar Forecast November 2015

Canadian Dollar Outlook November
The U.S. dollar is anticipated to strengthen towards the end of the year as U.S. economic conditions continue to improve relative to the global economy. While the Fed has chosen to delay a raise in interest rates once again, anticipation for normalization in monetary policy before 2016 will support demand for the U.S. dollar. Ultimately, the main drivers for the U.S. dollar continue to be signs of growth in the economy and anticipation of divergent monetary policy before the years end.

Volatility in the Canadian dollar has resided temporarily as eyes rest on any significant changes in the domestic economy, relative policy, and commodity prices. However, negative outlooks in these important factors permit the bearish consensus for the Canadian dollar to persist. The aforesaid factors coupled with an anticipated interest rate increase by the Fed can contribute to a lower Canadian dollar by years end; a range of 1.32-1.35 USD/CAD remains possible. Looking forward, Canadian dollar holders will need to keep a focus on developments in the domestic economy, commodity prices, and any shift in stance sentiment from the Bank of Canada or Federal Reserve.

Canadian dollar bears have little to fear as the year comes to a close. Analysts continue to project the Canadian dollar to push beyond 11-year low boundaries as the hawkish Fed contrasts the neutral/dovish Bank of Canada. This is unlikely to change in the near future as the Bank of Canada is looking for growth in non-energy led exports to help the Canadian economy to absorb the impact of low oil prices. Canadian dollar bears should remain aware of any sharp upward changes in commodity prices, significant improvement in the domestic economy, or stance in monetary policy as potential risks that can derail the Canadian dollar bear case.

Canadian dollar bulls will likely remain disappointed to end the year as the economy struggles to find its footing. There have been some positive signs with regards to economic indicators and an upward revision of real GDP growth from 1.5% to 2.5% quarter over quarter by the Bank of Canada. However, with stubborn weakness in oil prices, the Bank of Canada will likely continue its dovish stance with regards to monetary policy in hopes of a continued export led comeback to close the year. Overall, the outlook appears to be slow and steady growth with soft expectations for growth projected into 2017.

Summary
For the coming months, the U.S. dollar and Canadian dollar pair continues to test new extremes with targets set around 1.32 and as high as 1.35 by year end.

Oil Prices
Oil prices for the short-medium term future will likely remain low; prices remain below $50 a barrel. Overall, continued global retrenchment in the oil & gas industry will need to endure in order to rebalance supply and demand conditions needed for resurgence in oil prices.

Canadian Economy and Bank of Canada
The Canadian economy is starting to show signs of life as conditions improve from the first half contraction of 2015. This has been led mainly by the increased competitiveness of the Canadian export sector as a result of the low Canadian dollar. Furthermore, residential investment and consumer spending remain as strong contributing factors to the domestic economy despite increasing market uncertainty. Labour market conditions have continued to improve, and auto sales remain at record highs. However, consumer confidence has dampened as future labour market conditions grow increasingly uncertain. Other factors putting downward pressure on the economy for the foreseeable future are weak business investment, weak energy prices, and a soft manufacturing sector. Overall, year-over-year growth is likely to average 1% in 2015. Headline inflation is likely 1% YOY, and core inflation just above 2% YOY mainly due to pass-through effects.

U.S. Economy and Federal Reserve
The U.S. economy has continued to show signs of improvement on the back of consumer spending and housing activity. Strong growth in labour markets and consumer confidence also helped to buoy the U.S. dollar. To date, the U.S. unemployment rate is a seven-year low of 5.1% and will likely remain near those levels for the near future due to recent strong job growth, supported by growth in construction and services sectors. Lending conditions are expected to tighten gradually, and is unlikely to impede further economic progress. While the U.S. dollar remains strong, the export and manufacturing sector will continue to suffer, however, if strong domestic activity can persist, the recovery should not be threatened. Overall, core inflation is slightly under 2% year over year with headline inflation expected to realign with core inflation in 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.