FX Monthly Outlook – February 2020

Economic Outlook and Summary

The Federal Reserve interest rate currently stands at 1.5-1.75%, with expectations of a neutral stance throughout 2020. The neutral stance is supported by higher-than-expected job growth and inflation, registering an increase in payroll by 225,000, and an inflation rate of 2.5%. Further growth is expected to remain within 2% for 2020, supporting a neutral stance throughout the fiscal year. The economy is set to monitor the progress of the coronavirus as China attempts to restrict the spread. The current effects are unknown and are expected to reflect in the next round of survey reports.

The USDCAD has rebounded from its January lows, with the CAD depreciating 2% for its worst month since December 2018. The Bank of Canada issued a neutral stance in its most recent interest rate call; however, it introduced the possibility of a dovish stance towards the end of the 2020 year. The announcement comes at a time where coronavirus resulted in a large decline for oil prices over concerns of lacking production from one of the world’s largest oil consumers—China. The CAD is expected to find support from the approval of the USMCA and Trans Mountain pipeline, and the recovery of the Chinese economy, once the coronavirus is sufficiently controlled. Going forward, the USDCAD is expected to move within the 1.31 range through the first quarter of 2020.

The US Dollar and Federal Reserve

The Federal funds rate is set to remain at the 1.5-1.75% range until the FOMC reconvenes in Mid-March. Nonfarm payrolls increased by 225, 000, while unemployment rose to 3.6%—payrolls significantly exceeding the 160,000 jobs consensus. The consumer price inflation rate climbed to 2.5% YoY in January, from 2.3% in December, driven by increasing costs of rent and clothing. The broader economy is expected to stabilize in 2020, with growth rates forecasted to record within the 2% range for the year. This growth will be tested by near-term risk-aversion by investors, as a result of the recent Coronavirus outbreak.

The US-China trade war has subsided following the Phase 1 agreement; however, new concerns have developed surrounding the recent outbreak of coronavirus. With Wuhan under quarantine and several other regions experiencing residential lockdowns, affected Chinese exports are experiencing dwindling supplies, due to residents and workers being confined and borders being locked down. The current effects will likely be reported in future surveys of manufacturer productivity.

The Canadian Dollar and Bank of Canada

The USDCAD has rebounded since its early-January lows and currently trades at 1.3253. The 2% depreciation of the CAD in January made it the worst month for the CAD in over a year. The performance can be tied to a fall in oil prices as WTI crude oil dropped 15% in the month. Additionally, despite the support provided by the recent neutral rate announcement, the Bank of Canada provided an indication of a dovish tone towards the end of 2020. This caused a surge in the USDCAD, amidst a full year of neutral interest rate projections from the Federal Reserve. Statistics Canada’s recent job report recorded a gain of 35,000 jobs, dropping the unemployment rate by 0.1%. The report reinforces the Bank of Canada’s stance as the economy remains relatively resilient, despite recent headwinds. The CAD is expected to find support from the ratification of the USMCA, and the upheld approval of the Trans Mountain pipeline. Given the current economic conditions, the USDCAD is expected to move within the 1.31 range through the first quarter of 2020.

Oil Prices

Oil prices experienced a sharp decrease recently, as investors became bearish amidst the recent concerns surrounding the coronavirus outbreak. The primary concern is related to a slowdown in China as the country tries to contain the spread of the virus, conducting regional residential lockdowns and the lockdown of the entire city of Wuhan. In an attempt to circumvent the effect of a possible slowdown in China, OPEC+ has proposed the cut of 200,000 bpd, in order to provide support to oil prices. Given that their statement relies upon the near-term stabilization of international trade, including the return of China to normal production as coronavirus is eradicated, any negative developments can significantly alter these projections from OPEC. Currently, the proposed cuts may not be enough to counter the effects of a slowdown in the Chinese economy, as the cuts will coincide with a weak quarter for oil demand—relative to other quarters.

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