Canadian Dollar Monthly Outlook- May 2016

Market Outlook

The outlook on foreign currencies will be highly driven by significant market events, risks, economic growth, and changes in monetary and fiscal policy. In the last month, volatility was definitely present. Commodity based currencies and emerging market equities performed quite well. It is expected that this will continue into the month of May. Most currencies have seen modest gains against the USD, especially in emerging markets. This has boosted investor confidence for securities, investments, and currencies in emerging markets. However, the low market trading conditions, ineffective credit avenues, and greater exposure to political risk in countries such as Brazil, Mexico, and Colombia leave a higher risk on these respective currencies, slowing down appreciations in these emerging markets.

Currency Outlook

Canada:

The CAD has been outperforming over the past month, appreciating significantly against the USD. However, it is important to note that events such as the Fort McMurray wildfires pose risks for the CAD. Alberta is one of Canada’s most oil-intensive economies, and with low productivity, a resultant fall in supply and distribution, exposes the CAD to an extensive risk of depreciation. As the CAD dollar has outperformed growth in the USD over the past month, there are mixed opinions as to how CAD will perform to end 2016.

The Canadian economy has proved better than expected economic growth so far in 2016. Annualized growth is expected at 3% in the first quarter. It is expected that there will be a boost in non-energy exports to countries such as the United States, although February’s merchandise trade failed to meet expectations. Furthermore, there are expected gains in consumer and household spending along with real estate investment, increasing the demand for Canadian dollars. With the introduced federal budget by the Canadian federal government, it is expected that there will be gains in output and productivity by increased government spending and investment, attracting foreign investment and thereby appreciating the value of the CAD. There has been positive momentum in the services and construction industries relative to the resource and manufacturing intensive industry. However, the manufacturing industry is expected to continue growing at a faster pace than the natural resources market in Canada due to increased technological innovation and productivity.  It is expected that employment will rise but only in increments over the year. Business confidence is still at a point that needs to rise. With household debt still prevalent and business confidence at a lower level relative to stronger years, household spending will remain conservative and this reduces borrowing and the demand for money. This has potential to slow down the appreciation of the CAD. With rising inflation at about two percent annually and rising food prices, the weaker Canadian dollar is reflected on imported goods into Canada as it is more expensive to import.

United States:

The US economy has seen slower growth over the start of 2016 of just 0.5% over the first quarter. It is still yet to be determined if this will last into the future over the months ahead or if this is just a temporary phase. With exports not being as strong as before, the number of both domestic and foreign investments has fallen commensurately. However, employment has improved drastically, along with strong growth in the automotive sector and healthy growth in retail with continued household spending. The credit environment has improved through low mortgage rates and demand for real estate, appreciating property values in the United States. Inflationary pressure continues to rise even with a weak USD through rising living and health costs. Observed inflation remains below 1%.

Monetary Policy in Canada and the United States

The Bank of Canada has been very neutral with monetary policy recently over the past month. The Bank remains confident that the Canadian economy will continue to expand and grow, showing healthy results. The Bank of Canada does not have an incentive as of yet to pursue aggressive monetary policy actions. The Federal Reserve is uncertain about both domestic and international growth. It is expected that the Fed will have two interest rate increases during this year. Such policies would be expected to appreciate the US dollar.

Forecast Table

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.