Canadian Dollar Monthly Outlook August 2016

Canadian Dollar Foreign Exchange Outlook August 2016

Market Analysis

Factors that are to affect the direction of the major currencies, including the US Dollar (USD), Canadian Dollar (CAD), British Pound, and Euro, include uneven global growth, weak commodity prices, and the decision for the United Kingdom to exit the European Union. The USD had outperformed since May; especially after Brexit, as the USD was a safe haven for investors. The United States economy is expected to outperform within the global landscape.

Brexit brought a significant level of financial and economic uncertainty to Europe and the United Kingdom, increasing the level of perceived risk and depreciating the value of their respective currencies. It is expected that the USD will strengthen over the year. It is expected that the CAD will struggle against the USD in the short term before stabilizing later in the year and by the end of next year. We have also seen volatility between the CAD and USD at various times with the CAD jumping up, creating a window of opportunity to buy US dollars before the Canadian dollar falls again. Weaker commodity prices and domestic growth in Canada in Q2 has put downward pressure on the CAD throughout the past month.

The Great British Pound has stabilized in the wake of the Brexit decision, where the British Pound dropped drastically, to the lowest levels since 1983. Uncertainty still remains with the UK economy. It is expected that growth within the European Union will modestly slow down in response to the Brexit decision and may result in a response from the European Central Bank in the fall of this year, as we have already seen accommodative monetary policy from the Bank of England.

Canadian Dollar Outlook

As we move to Q3, it is expected that the CAD experience downward pressure due to the strong relative performance of the US economy. Consumer demand in Canada has experienced slow growth, making domestic and foreign investment in Canada seem less attractive relative to the US. Jobs data in Canada showed that increases in the labour market have offset declines in the commodity sector, despite weak July figures. Increase in fiscal spending and investment is expected to enhance productivity and economic activity in the coming quarters.

Canadians are likely to remain cautious spenders due to household debt and slower microeconomic growth. Manufacturing and automotive sales are expected to increase in the near future. The competitive nature of the US election may put downward pressure on the US dollar if there is more uncertainty and risk in terms of economic and political policies which affects economic and social growth domestically and internationally.

It was also announced that the British Columbia government will be imposing a tax on real estate demand and investment by foreigners and for owned-vacant properties due to the high real estate valuations especially for cities like Vancouver, British Columbia and Toronto, Ontario. Housing continues to become tighter in such geographic regions, due to vacant ownership and demand by foreigners who are willing to bid and pay premiums for real estate in Canada, driving prices to record-breaking valuations making it unaffordable for many Canadians. As there is a real-estate tax imposed for foreigners and vacant properties, this causes the demand for Canadian dollars to go down as foreigners are less inclined to make real-estate investments in Canada.  Many believe that a bubble exists in Canadian housing, an added tax could be a catalyst for a downturn, however, many expect buyers to move to other parts of the country where the tax does not exist.

The key factors for the Canadian dollar remains jobs data, oil prices, and overall economic growth.  Look for the loonie to follow oil prices directionally.

United States Economy

Consumer spending, rising income, and housing activity have been solid performers within the US economy. The labour market has also seen strong gains throughout the year so far. The service sector is booming in areas such as retail and wholesale trade, real-estate, construction, and healthcare. Increased government spending has also enhanced infrastructure and investment within the US economy. However, with a stronger US Dollar, export sales are negatively impacted as it is more expensive for other countries to buy goods from the United States.

Look for a strengthening US economy to entice the Fed to raise rates sooner rather than later. A rate hike in the US would cause a flow of funds in to the US dollar and it should rise if it happens sooner rather than later.

FX Forecast Table

 Updated August 2, 2016, subject to change by the banks anytime.

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.