Canadian Dollar Monthly Outlook September 2016

September 2016

Market Analysis

After a slow first half of the year, the economy in the United States seems to be gaining strength. Jobs data in the United States has shown prosperity relative to Canada. The United States Federal Reserve may consider raising interest rates towards the end of the year. Commodity prices have dropped as additional focus was put on the Federal Reserve in the US, with a case made to tighten monetary policy and raise interest rates. This is a reason why the US Dollar (USD) has outperformed the Canadian Dollar (CAD) towards the end of the recent month. There is a chance that economic growth in Canada will improve over the second half of the year with a stronger reliance on non-resource export growth, such as manufacturing. The Bank of Canada is expected to maintain stable monetary policy over the year in expectation that the CAD will become stronger through market supply and demand.

As the Euro remains weak, primarily due to Brexit, additional monetary policies may be undertaken by the European Central Bank to cut interest rates, increasing the money supply within the European economy. This will boost spending, investment, and economic growth.

The Great-British Pound (GBP) has been out-performing over the second half of August 2016 with better housing, consumer confidence, and economic activity. This seems to be surprising from the recent Brexit decision to leave the European Union and all the uncertainty involved. However, it is still early and it doesn’t mean that risk has been eliminated for Britain. The Bank of England acted quickly, implemented policy accommodations over the past month and gave market participants additional confidence. The United Kingdom will still need to increase and foster economic growth as it remains a challenge.

Canadian Dollar Outlook

In Canada, export volumes have been down more than 5% over the year, the worst performance since 2009. Business investment from the international community does not seem to be moving as much with growth more dependent on domestic factors, such as housing. This implies that the CAD may weaken. Lower commodity prices also reflect a weaker CAD. Over Q2 of this year, Gross Domestic Product (GDP) contracted at an annualized rate of 1.6% in Canada. The Alberta wildfires in May 2016 reduced oil production, causing the Canadian dollar to fall, as there was a lack of supply and business operations were suppressed within this particular industry in Canada.  The CAD may rebound in Q3 as oil production in Canada continues to recover. The oil industry in Canada lost many jobs. Businesses continue to remain cautious with costs, especially with employment. Fiscal policy by the government continues to remain as an integral play in the growth of the Canadian economy with increased government spending and investment in areas such as training and development and technology.

US Dollar Outlook

The US economy and Dollar has seen strong performance over the second half of 2016 relative to the first half with gains in consumer spending, real-estate activity, income, low gasoline prices, and lower borrowing costs. With the Fed making a case of expecting to raise interest rates towards the end of this year, there has more demand for US Dollars over this current time. This is because money seems to be cheaper now as there are expectations that borrowing costs, also known as interest rates, will go up in the coming months. This has strengthened the US Dollar over the past month. Furthermore, the unemployment rate continues to remain below 5% in the United States which is a very good indication of economic growth.

FX Forecast Table

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