Canadian Dollar Monthly Outlook January 2019

Economic Outlook and Summary

As we saw late last year, our CAD depreciated by 8% against the USD. As it turns out, so far, we have seen the USD now dramatically dropping. This is particularly due to the return of risk taking after the collapse in the global stock market last year. Therefore, for the US dollar to remain weak, trade tensions between the US and China or the European Union will need to diminish. Forecast shows that even if there are hints of USD strength, it is expected that the dollar will give back, at least half of last year’s gains, through this year.

The record spreads between Western Canada Select and WTI not only raised issues with predictions regarding oil sands, but it also affected the economy as a whole as it is a main reason for the loonie’s downfall. It looks like WSC-WTI spreads have now returned to normal due to production cuts and increased oil shipments by rail, thus looking to strengthen the CAD.

Although currency forecasts remain stable since last month, it seems as though the forecast for our CAD loonie is positive for 2019. After the major decline regarding oil prices after Q4, global oil prices seem to be getting better. This is because there are production cuts agreed by OPEC and Russia so that we can come back from a state of surplus supply. It is expected to reach $65 per barrel by the end of 2019, thus benefiting the Canadian dollar as well. Canada’s real GDP growth is likely to drop under 2% in 2019 as there are some restraints such as consumers with high debt and an expected moderation of employment growth.

The US dollar and the Federal Reserve:

The US dollar has rallied quite significantly against the Canadian dollar in December. The U.S Federal Reserve decided to raise interest rates for the fourth time in 2019 to reflect the U.S economy’s continued strength. However, policymakers are currently forecasting that the Fed will slow their hikes, expecting two hikes to come in 2019 and one hike in 2020. The US dollar appears to be performing extremely well, but the market may be over stretched. The last full week of December suggested that perhaps the market is beginning to exhaust. A pullback in January makes a lot of sense, keeping in mind that crude oil looks to bounce back, and these markets have an inverse relation. Heading into 2019, Global trade tensions remain high between the U.S and major trading partners China, and the European Union.

The Canadian Dollar and Bank of Canada

The Canadian dollar really weakened towards the end of 2018, with a depreciation of 8% against the USD. This was the worst annual performance for our dollar since 2015. There were many trade-related uncertainties circling which did not help the loonie strengthen, however, we saw a further weakening at the end of the third quarter even after the agreed upon USMCA trade deal. By early December, the interest rate spreads between Canada and the US widened to minus 75 basis points. We could also put the oil pricing to blame as there was a 38% decline in total at the end of Q4, being the worst quarterly loss in four years. However, outlook on the loonie is still positive because as it turns out, Canada’s correlation with oil is stronger than with interest rate spreads. In conclusion, if this forecast is correct and world GDP growth does not worsen, we will see the USD/CAD moving closer to our target of 1.27 that was expected mid of last year.

Oil Prices

During the month of December, the OPEC meeting continued in hopes of addressing the existing surplus supply and concerns that global demand is shrinking as well. Early in the December the WTI Crude Oil market fluctuated at the $50 level which should have been a strong support level. However, the bearish pressure in this market led towards testing the $45 level. Late in December OPEC made an agreement with Russia to cut production by 1.2 million BPD of oil from the market. The last time OPEC announced a major cooperation agreement with Russia, oil prices rallied from the $40s up past $70/bbl once it came into effect. Oil prices have remained highly volatile, but in the coming months recovery of oil prices towards $60/bbl can be expected. Since, OPEC and Russia produce more than 50% of the world’s oil, they have significant pricing power if producers manage to maintain discipline on the production cuts. Given the positive results it makes sense for them to do so.

FX Forecast Table January 2019

*Figures based on previous month