FX Monthly Outlook – July 2019

Economic Outlook and Summary

The U.S Federal Reserve’s dovish turn in the month of June caused the U.S dollar to register its first loss since January 2019. The Fed has signaled rate cuts could be coming in 2019 and possibly be in the month of July. Since the USD is heavily trade-weighted, it is still unclear on how much of a decline the USD will face if the Fed decides to cut rates. The projected rate cut is said to be 25 basis points or 50 basis points, which in turn would help the USD appreciate. On the other hand, the ongoing trade war with China and U.S will need to make further progression before economic outlook can be analyzed. A truce in the trade war will likely push positive sentiment throughout the financial markets leading to slightly better economic prospect moving forward.

Canadian dollar had a strong month of June as it realized its largest gain since the beginning of 2019. With 3.6% appreciation year-to-date the Canadian dollar became the best performing major currency as of yet in 2019. The CAD benefited from strong economic data and top indicators such as inflation and employment signaled a great rebound which has propelled the Canadian economy. Analysts expect Bank of Canada to act cautiously to this movement in the financial landscape, and for the most part they believe the central bank will pause their plans to see how economic conditions unfold.

The US Dollar and the Federal Reserve

The U.S. dollar which fell in June for the first time in five months has dropped across the board against major pairs. The greenback has lacked traction since the Federal Reserve took a sudden dovish turn to their stance. While the Fed left the key rate unchanged in June, the Fed has heavily signaled that an interest rate cut could be coming this year as soon as July. The Fed will closely monitor the implications of incoming information with regards to economic outlook and will act as appropriate to sustain the expansion. If there are indicators of economic improvement, the Fed could keep the benchmark unchanged. However, the Fed is projected to cut rates by 25 or 50 basis points and the impact is uncertain. A small rate cut could help the USD appreciate rather than depreciate if it’s below the market expectations of a 75 bp decrease this year. Even a 75 bp rate cute or more may not necessarily punish the USD if the stimulus is coming in the context of heightened concerns about the global economic outlook, which may instead boost the greenback via safe-haven flows.

The Canadian Dollar and Bank of Canada

The Canadian dollar realized its largest gain against the USD since the beginning of the year. The Canadian dollar’s year-to-date appreciation is now 3.6%, which makes CAD the best performing major currency so far in 2019. GDP output and growth have been stagnant the last two quarters due to mandated oil production cuts. However, investors are positive and encouraged by strong economic data coming out of the Canadian economy. Top indicators including employment and inflation are showing signs of a sharp rebound in the second quarter of 2019. Strong economic data, stabilization in the housing market and the return of oil production has boosted the economy and CAD during the quarter. Along with the Canadian economy rebounding, the U.S Federal Reserve’s dovish turn has also contributed to significantly lowering CAD/USD differentials. Although, these positive developments do no guarantee that the Bank of Canada will turn hawkish. The global trade landscape is still sitting on a load of uncertainty which represents a risk factor significant enough to keep the central bank sedentary for now. Analysts predict rate cuts will only come in to play if financial conditions deteriorate in the second half of the year, which is unlikely based on historical evidence. The consensus on the year-end target for USD/CAD has been unchanged as many believe the rate to be 1.30 moving into the new year.

Oil Prices

US crude oil prices have been falling on news of rising inventories and forecasts of weak global demand. While Inventory data influences the short-term nature of fluctuation, increasingly bearish concerns around global economic growth will play a larger role in guiding oil prices. Uncertainty over demand in June was offset slightly by the outlook for global supply as OPEC+ members announced production cuts will extend through March 2020; previously set to expire at the end of June 2019. The success or failure of trade talks between the U.S. and China will be a decisive factor for oil’s price outlook this year. Temporary restraints on industrial productivity remain as the two largest consumers of crude struggle to reach a trade deal. The U.S.-China trade war has dampened prospects of global economic growth and oil demand, but the countries agreed to a truce at G20 to resume negotiations aimed at resolving the deadlock.

FX Forecast Table July 2019

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