Canadian Dollar Update April 2018

Economic Outlook and Summary

The month of March saw the Canadian Dollar and Economy move sideways as the month began with fears of a potential trade war. The future of the North American Free Trade Agreement (NAFTA) is in jeopardy, as it is currently being negotiated. The Bank of Canada (BoC) decided to keep interest rates unchanged at 1.25%, as it offered a watchful tone surrounding uncertain trade policies with the United States (US). Mid-March saw a bullish outlook as reports confirmed that the President Donald Trump agreed to exempt Canada from the new 25% and 10% tariffs on steel and aluminum, depending on how NAFTA negotiations are resolved. During the BOC meeting Canadian employment figures rose as the jobless rate ticked lower to 5.8%. BOC Governor Mr. Poloz also highlighted that the current Canadian economy could handle more growth without galvanizing inflation, giving a dovish outlook against market trends with a potential rate hike coming in the mid-summer months. NAFTA reports gave the Canadian Loonie a boost through the middle of March with the automotive content proposal looking beneficial for Canadian industry.

The US economy started the month of March signing an order for tariffs of 25% on imported steel and 10% on aluminum. This order sparked fears in the global economy of a potential trade war with the US. The US greenback saw early selling pressure as crude oil prices negated any gains. The US economy had also released reports showing the trade deficit had widened to $56.6B and has showed with the current economic stance on the imposed tariffs.  The US economy built further strength with job reports surprisingly surpassing estimates, showing stronger job creation with lower wage inflation. Mid-March saw the current economic state reflect in the greenback currency reaching high’s not seen in around 8 months, however concerns are still warranted surrounding President Donald Trump’s protectionist stance. The Federal Reserve Bank announced that it is raising interest rates as was expected and already priced into markets but stayed firm on the forecast of around three hikes throughout the year. By the end of the month increased selling pressure occurred for the greenback as US jobless claims had rose and the US announcing tariffs on US imports from China in the amount of $60B, sparking further fears of a potential trade war, but details are yet to be finalized.

Recent data being released by major Canadian Financial Institutions has indicated the expectation of the Canadian economy to gain some future strength with stronger oil prices and improved economic outlook. Most of these institutions have updated their figures reflecting in a moderate alteration, showing potential economic stability in the Canadian economy and a potential for U.S growth through the mid-year.

Oil Prices

Oil showed to have a bullish run throughout the month of March. The month of March showed a weaker tone surrounding oil markets, with oil selling at discounts and later pairing a slight uptick.  Oil inventories saw a decline and pushed the price to the $65 mark, currently WTI is sitting at a high $63 mark. Reports mentioned Russia and Saudi Arabia were working on a 10-to-20-year deal in place for potential supply cuts; this could lead to a bullish boost in oil prices and spillover to the commodity-linked Loonie if a deal is finalized.

The Canadian Dollar and Bank of Canada

The Canadian dollar amongst the worst-performing major currencies this year. The Loonie is suffering from the impact of an unfavorable Canada-US interest rate spread. The Canadian dollar lost almost 3% against the USD in Q1. Investors seem to be concerned about NAFTA negotiations, the housing market, and the sustainability of consumption growth. If NAFTA talks do result in a positive outcome, then this would remove a major uncertainty from an otherwise positive economic outlook. That would allow the Bank of Canada to address capacity pressures which have pushed up core inflation in the past years. Although these factors do weigh heavily on the outlook of the Loonie, as expectations of the USD/CAD rate to be heading back towards 1.20 in the coming months remains a possibility.

The USD and the Federal Reserve

The US dollars’ descent throughout 2018 continues as its quarterly depreciation in Q1 was the fifth in a row, marking the worst slump in ten years. Foreign investors may not find US debt securities as attractive during a worsening fiscal situation as the country’s budget deficit is projected to rise past 5% of GDP next year. Any attempts to find a quick fix for America’s trade deficit is most likely to be unsuccessful. One way to narrow the gap would be to move towards an economic slowdown which would increase savings and reduce consumption and investment. Even world central banks are hesitant of the US dollar as foreign investors are not keen in financing US deficits which have been correlated with a weakening greenback. As a result, central banks are spreading their foreign exchange holdings away from the dollar. Hence, the outlook for the US dollar is bleak in the near-term.

FX Forecast Table April 2018

*Figures based on previous month