Canadian Dollar Forecast September 2015

Canadian Dollar Forecast September 2015

The improving US economy continues to be reflected in the strong US dollar and can be expected to continue strengthening as the year closes. Although the Fed rate hike date is now highly contested, relatively weak global economic growth relative to the US should continue to prop up the US dollar.

The Canadian dollar has continued its weak trend with oil prices dropping below $40 a barrel this month. With high volatility remaining in oil prices and sustained weak commodity prices, the broad trend in the Canadian dollar remains poor. This is supported by Canada entering a technical recession, and consequentially an increasing probability of yet another rate cut in Canada to boost economic growth. The biggest drivers behind the Canadian dollar continue to be persistently low oil prices, poor commodity price performance, domestic macroeconomic data, and relative monetary policy.

Canadian dollar bears remain relatively secure as the US economy continues to strengthen. Positive U.S. data related to jobs, manufacturing, construction, housing, and consumer spending will help sustain the Canadian dollar bear case. Furthermore, rate cuts in China have dimmed hopes for a Canadian economic revival as they indicate slower global economic growth, weakening Canada’s export outlook. The effect this will have on the Bank of Canada’s non-energy export driven path to economic policy normalization remains indeterminate.

In terms of Canadian dollar drivers, Canadian dollar bears can depend on persistently low oil prices in continuing to limit Canadian dollar strength. Saudi Arabia appears to be intently focused on gaining market share, and their refusal to limit production will keep oil prices low in the near-term. Weak global growth overall will also aid in supressing the Canadian dollar. Furthermore, interest rate differentials and widening monetary policy divergence between the Bank of Canada and the Federal Reserve will continue to push the U.S. dollar higher while keeping the Canadian dollar relatively low.

Canadian dollar bulls are hoping for a strengthening domestic economy in Canada, strengthening oil prices, and a less nervous Bank of Canada. China’s growth will impact commodities, therefore, China’s economic growth will need to continue at a fast pace to satisfy Canadian dollar bulls. Limited economic downside in Canada could help the Bank of Canada hold tight on interest rates, removing some downside of another interest rates cut. At the end of the day, Canadian dollar bulls need a strengthening domestic economy to carry the way forwad.

Other domestic factors that will likely contribute to a weak Canadian dollar for the rest of the year are continued weak business investment, poor energy sector outlook, and poor consumer spending. Lastly, with Canada now in a technical recession, weak wage growth is unlikely to improve in the near future. Compounding weak wage growth is recent global volatility, likely resulting in softened consumer spending and confidence. As a result, previously strong housing and auto sector data can be expected to dampen.

Summary
As to what to expect in the coming months, the U.S. dollar and Canadian dollar pair continue to test new extremes with a target of 1.35 USD/CAD for the end of the year not out of the question.

Oil Prices
Oil prices have been highly volatile, breaking the $40 threshold for the first time in recent memory this month. In most recent days, oil has swung well above $40 due to decreased US supply and new OPEC production talks. Overall, if oil prices amongst other commodity prices remain low, the Bank of Canada will likely cut rates again. However, if oil prices can sustain their recent rally, there may be chance for slight improvement in Canada’s economy to end the year.

Canadian Economy and Bank of Canada
With Canada’s economy contracting in the first half of 2015, Canada has now entered a technical recession. This has been due to large decreases in energy sector investment, temporary disruptions in the manufacturing sector, and weak global demand. However, there is some positivity with the labour market managing to continue growth at a moderate pace. The second half of the year is expected to improve modestly, nonetheless expected output growth has been downgraded to roughly 1% this year. In terms of monetary policy, if growth data improves in the 3rd quarter a further rate cut is unlikely, however, in the unfortunate scenario that Q3 disappoints, the possibility of a rate cut persists. Overall core inflation has lifted slightly to 2%-2.25% year over year, largely due to Canadian dollar pass through effects.

U.S. Economy and Federal Reserve
Although the US has seen continued improvement in the labour market, housing, consumer spending, and domestic sales numbers, global growth figures remain tepid. Resultantly, many are anticipating that a rate hike in September is unlikely, and may ultimately be delayed until December 2015. With increasing global volatility, the Fed will have to be prudent in determining its monetary policy over the next several months. Overall core inflation remains slightly under 2% year over year on the back of stronger service sector price trends mitigating low import costs and low wage gains.

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.