Canadian Dollar Outlook May 2015

Canadian Dollar Outlook May 2015

The US dollar has been taking a huge hit over the last several weeks, retracing some of its gains in 2015. The key factor that has been impacting the US dollar has been interest rate differential and the economic outlook for the US, which has weakened from previous expectations as the US economy has started to moderate.

The Canadian dollar has benefited from a more positive tone from the Bank of Canada, which only a few months ago was a key downside catalyst in the Canadian dollar. The Canadian dollar has also benefited from rallying oil prices which are now near $60/bbl compared to mid $40’s a few months ago.

For USD/CAD, it’s all about oil prices, interest rate differentials, and economic divergence between Canada and the US.

Summary
The Canadian dollar bears are hoping that the US economy picks up in the latter half of the year with strong job and growth data. This would encourage the Fed to raise rates sooner rather than later and interest rate differentials will help flow of funds in to the US dollar causing a rise in the US dollar. It remains all about the US economy and the Fed for the US dollar.

Canadian dollar bulls are hoping for oil prices to continue to rise. There is a strong correlation between the Canadian dollar and oil prices and it seems like oil prices have bottomed already. Moreover, the Canadian economy should benefit from a weaker loonie and a stronger US economy as what is good for the US will eventually be good for Canada. Canadian dollar bulls are also hoping the US Fed kicks the can forward and delays an interest rate hike towards early next year allowing the Canadian economy to rebound by then.

While the US dollar has depreciated over the last month, it is hard to see the Canadian dollar rallying significantly because jobs data in Canada is still weak and the Canadian economic outlook is murky. The Federal Reserve holds all the cards and all eyes are on them as to when they will raise interest rates in the US. Look for USD/CAD to remain rangebound between 1.19 and 1.24 in the short term, looking for direction from economic data.

Oil Prices
Oil prices have gained from their lows of 2015 and are near $60/bbl, exactly where the Bank of Canada had assumed in its medium term forecast. Oil prices have started to rise as the supply side starts to correct itself with oil production and oil inventories reacting to reduced oil prices. The Canadian dollar continues to be highly correlated to oil prices in the near term and correlations are about 80%+.

Canadian Economy and Bank of Canada
The Bank of Canada has started to have a much more positive tone than from earlier this year. When oil prices were falling, the Bank of Canada was screaming panic and reacted with an “insurance” move by cutting interest rates. Only a few months later, the Bank of Canada has indicated that despite the Canadian economy not being strong, it is definitely not in panic mode anymore and the Canadian economy has been able to react and adjust itself to falling oil prices. Economic data has not been “atrocious” as the Bank of Canada once thought it was going to be. Expectations of another interest rate cut in Canada are long gone now whereas it was expected a few months ago. That is how quickly things can change and oil prices played a big role in that.

Canadian jobs data has not been outperforming and the Canadian economy is still fluttering and is definitely not as robust as the US economy. It is hard to see the Canadian dollar rallying significantly because the Canadian economy is still lagging.

US Economy and the Fed
The US economy has stalled a little bit but growth is expected to pickup for the rest of 2015. Cheap oil prices should help the US consumer and the job market is doing well in the US as the unemployment rate is near a 7 year low. US dollar strength has started to impact the US export market. Many expect the US economy to regain its momentum for the rest of 2015 and the Fed has indicated it is data dependent and not date dependent. The Fed holds all the cards for the US dollar and this will be the biggest catalyst in 2015 for the US dollar. If the US economy can pickup, as many expect, and inflation is strong, look for the US dollar to rally towards the end of the year. In the near term, look for USD/CAD to be rangebound until economic data determines its direction.

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.