With the first month for the fiscal 2017 year coming to an end, investors are experiencing difficulty anticipating the outlook for the USD since Trump’s inauguration. January experienced various unexpected shocks that had caused large fluctuations to the USD/CAD pairing; with the primary drivers being oil prices, political factors, and anticipation of future policies, both fiscal and monetary.
Summary
Despite January’s decline in USD/CAD, the majority of Canadian banks forecast an appreciation of the USD into Q2, followed by a CAD rebound in subsequent quarters. These prospects are a result of contrasting monetary policy between Canada and the United States.
Oil Prices
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Oil prices increased to $53.83 a barrel on the New York Mercantile Exchange, representing a 19% increase since the agreement to limit oil supply on November 30, 2016.
Canadian Outlook and Bank of Canada
For Canada, January was a positive start for 2017. Employment data showed over 100,000 creations in jobs and investors had expressed stronger interest in the Canadian dollar; causing the Canadian dollar to go up.
The increase in the Loonie however could have a negative effect on the Canadian economy as it can deter exports of non-energy goods. While increasing oil prices has proved to be favourable for Canadian exports and the dollar, this advantage is expected to decrease over time.
U.S. Economy and Federal Reserve
Claims of the USD being “too strong” and that Germany is using a “grossly undervalued currency” from the Trump administration caused the greenback to fall in January for the first time in 4 months. This in turn caused the Euro to appreciate.
In the upcoming months, the USD is likely to appreciate due to expected fiscal expansionary policies set forth by the new Republican administration which includes deregulation, more fiscal spending and tax cuts.
NAFTA
Should Trump be successful in his campaign for American protectionism during the NAFTA negotiations, this would be unfavourable for the Mexican and Canadian economy in the short-term due to significant decreases in US exports. Greater uncertainty in the US economy could cause the USD to become bearish due to diminished domestic and foreign confidence in the greenback.
The outcome of the NAFTA negotiations is still unclear but the conclusion of the agreements could prove detrimental for not just its members, but any other nation that rely heavily on NAFTA members’ economies.
FX Forecast Table
| Bank | 2017 – Quarter 2 (USD/CAD) | 2017 – Quarter 4 (USD/CAD) |
| Scotiabank | 1.40 | 1.36 |
| Royal Bank of Canada | 1.38 | 1.38 |
| Bank of Montreal | 1.37 | 1.37 |
| Canadian Imperial Bank of Commerce | 1.36 | 1.37 |
| Toronto Dominion Bank | 1.35 | 1.34 |
| National Bank | 1.40 | 1.37 |
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