Several unexpected exogenous events took place which caused the CAD to appreciate in May. Oil prices continued to function as the primary driver in the fluctuation of the USDCAD and will likely remain the case for this fiscal month.
Summary
Most banks are forecasting a decline in the USD/CAD foreign exchange transitioning into Q3 as interest spreads begin to settle in both economies. The potential interest rate hike by the Federal Reserve in June may cause a temporary appreciation in the USD. Oil prices will likely continue to be the bedrock that determines the USDCAD trend for June.
Oil Prices
Brent Crude is priced similar to the previous month around $47-48 per barrel. Markets were unaffected by OPEC’s announcement regarding the extension of oil supply restrictions. Oil prices remain pressured due to global oversupply.
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Canadian Outlook and Bank of Canada
The Bank of Canada has reversed their dovish rhetoric on the Canadian economy, focusing on the discussion of improving the global economy and the fact that Canada’s adjustment to the oil shock is almost complete. Markets are speculating a change in the BoC’s monetary policy stance in the medium-term, which would cause markets to become bullish compared to a previous dominant bearish-neutrals.
Still, Canada’s current account position is still looking bleak, trading at a significant deficit. Any significant event that leading to capital outflows could lead to trouble for Canada’s economy.
Many events in May that would normally cause the loonie to appreciate were mollified by declining oil prices. The correlation between oil prices and the USDCAD may decline moving forward; however, the likelihood is very minimal (if temporary) as oil prices are not fixed in and American producers remain consistent in their production.
U.S. Economy and Federal Reserve
With a potential interest hike in June, the greenback is likely to see a temporary spike. Markets are beginning to question whether there will be a third interest hike for 2017 as an anticipated shrinkage of the Fed’s balance sheet would make a third interest hike negligible.
Should the incoming interest hike be the last for 2017, a converge of monetary policies between Canada and the U.S. is like to be CAD supportive.
FX Forecast Table (June)
| Bank | 2017 – Quarter 3 (USD/CAD) | 2017 – Quarter 4 (USD/CAD) |
| Scotiabank | 1.38 | 1.36 |
| Royal Bank of Canada | 1.39* | 1.40* |
| Bank of Montreal | 1.36 | 1.34 |
| Canadian Imperial Bank of Commerce |
1.36* |
1.34* |
| Toronto Dominion Bank | 1.32 | 1.31 |
| National Bank | 1.36 | 1.32 |
*Based on May’s Forecast
FX Forecast Table (May)
| Bank | 2017 – Quarter 3 (USD/CAD) | 2017 – Quarter 4 (USD/CAD) |
| Scotiabank | 1.38 | 1.36 |
| Royal Bank of Canada | 1.39 | 1.40 |
| Bank of Montreal | 1.36 | 1.34 |
| Canadian Imperial Bank of Commerce |
1.36 |
1.34 |
| Toronto Dominion Bank | 1.34 | 1.33 |
| National Bank | 1.38 | 1.35 |
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