Canadian Dollar Monthly Update March 2019

Economic Outlook and Summary

U.S and Canada’s central banks have shifted into a wait-and-see mode now that their policy rates are narrowing in on the lower bound estimates of the neutral range. Waiting will hopefully reset the bar for further rate hikes in 2019, but there is uncertainty surrounding an economic recovery that can sustain the financial market. It could take a number of months before data provides either support or refute for further rate movements from the Federal Reserve and the Bank of Canada. Until then, patience will be the catchword for 2019.

With burden of proof on data, and specific pre-conditions to be met before a central bank steps back in with another upward policy rate adjustment. It’s important they for factors indicating financial stability, global growth and intensifying domestic inflationary pressures to materialize. It has been long argued that 2019 will be the peak in the interest rate cycle, the case has probably become more compelling now than it was in 2018.

The US dollar and the Federal Reserve

In February 2019, a weaker trade-weighted USD stabilized, after three consecutive monthly declines. However, speculators are once again making net long positions on the USD amid a more cautious Federal Reserve and flat U.S. yield curve. Since 2015, the Federal Reserve led by Chairman Jerome Powell had been raising interest rates to keep the economy from overheating as unemployment fell to the lowest in a half-century. The economy may be slowing a bit faster than anticipated, forcing the Federal Reserve to remain sidelined. It may take several meetings before Federal policymakers have a clearer read on whether risks are becoming reality before making new changes

The Canadian dollar and Bank of Canada

The loonie lost ground against the USD in February, despite the price of WTI oil rising and February’s published Canadian economic data for inflation, GDP and employment being in line with consensus expectations. The loonie’s struggle during February can possibly be linked to weak foreign capital inflows as foreign investors have lesser interest in Canadian assets. Although there is a lack of timely data to confirm this, 2018’s net foreign purchases of Canadian securities C$70 bn marked a 5-year low, and net foreign purchases of Canadian bonds C$24 bn marked an 11-year low. The Canadian currency will not receive much help from the Bank of Canada until at least the second half of the year. Soft housing market, weak consumption and low inflation should keep the Bank of Canada in pause mode for the time being.

Oil Prices

February 2019 is the second consecutive month Crude oil has closed positive. Looking at the weekly charts, Crude oil steadily moved upwards reaching new 2019 highs past $55, but gains were capped below $60. While multiple factors could have contributed for recent positive price action in the crude oil market, OPEC’s production and supply cut enforcement likely plays a key role providing crude oil bulls with fundamental support. Geopolitical events will continue to control the price action of crude oil in the global market as Investors are mainly focused on the Sino-U.S trade war. If a tariff is imposed on either of these markets the global economy would be greatly affected and a slowdown in either nation’s manufacturing activity would lead to reduced consumption and demand for crude oil in the broad market.

FX Forecast Table March 2019

*Figures based on previous month

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