FX Monthly Outlook – October 2019

Economic Outlook and Summary

The Federal Reserve signaled towards a dovish stance in early-October as it announced it will begin to purchase Treasury bills and conduct overnight repurchase agreements—a sign of short-term quantitative easing. Additionally, the US agreed to hold tariffs at 25% and China agreed to purchase 40-50 billion dollars of US agriculture, signaling towards positivity in the global economy. Consequently, analysts forecast expansionary monetary policy to continue—to a lesser degree—at the end of the month, in the form of a 25 basis point rate-cut during the October 30th meeting. The expectations are a result of Powell’s acknowledgement of the slowing US economy and an unresolved US-China trade war.

The Canadian dollar experienced a sharp increase in early-October following positivity from the US-China trade war, labour market statistics, and a robust GDP growth in Canada. Positive sentiments stemming from the trade agreements are expected to increase oil consumption and prices—increasing the value of the loonie, which has been closely tied to oil prices in recent months. Despite this, the BoC may be forced to keep the loonie low, if it adopts smaller current account deficits, as it experiences a net outflow of investments. Expectations for interest-rates are neutral until a fiscal budget is announced after elections. In conclusion, positivity from the Canadian economy will support the loonie in the near-term towards year-end; however, the CAD may be suppressed in 2020 as a result of negative investment inflow—supporting the consensus USDCAD target of 1.31 by end-of-year, and increasing in early 2020.

The US Dollar and Federal Reserve

The Federal Reserve signaled towards a short-term cycle of quantitative easing as it announced it will begin to purchase Treasury bills and conduct overnight repurchase agreements as of October 15th—ensuring an ample supply of reserves. Powell’s announcement is the result of repo rates increasing beyond the 1.75-2.00% range, in mid-September, as reserve supplies were strained by corporate tax payments and treasury debt issuance. Analysts forecast that long-term measures will be taken in the form of a rate cut at the end of the month, during the Federal Reserve’s October 30th meeting. The expectations are a result of Powell’s announcement of slowing growth, and the absence of long-term quantitative easing in the form of Treasury bonds purchases.

Growth in the non-manufacturing sector slowed as the NMI registered 52.6 percent—3.8 percentage points below August’s 56.4 percent—and several other indicators of fell below August’s readings. Non-farm payroll also contributed to negative sentiments as it fell short by 9,000 jobs—registering 136,000 jobs. This prompted analysts to call for a 50 basis point interest rate cut later this month; however, with the apparent quantitative easing already in place, a 25 basis point cut seems more likely. Going forward, analysts will be looking towards the US-China trade talks as a determinant of economic growth. After recent talks, China was granted its original requests as tariffs remain at 25% with an agreement to spend 40-50 billion dollars on US agriculture exports.

The Canadian Dollar and Bank of Canada

The USDCAD currently sits at 1.3198 as it slips from its high of 1.3342 in early September. The Canadian economy demonstrated a strong month as it added 54,000 jobs, bringing unemployment down 0.2% to 5.5%. Employment is currently up 2.4% from a year ago, indicating healthy growth in the Canadian economy. Further developments from the US-China trade war may boost the Canadian dollar in the near-term, as a truce will likely result in positive investor sentiments—supporting oil prices. Similar strength in the loonie was seen after phase one of the negotiation ended positively on October 11th. Despite this, Canada’s current account deficits have relied upon a dissipated net inflow of investments, necessitating a suppressed loonie going forward, if Canada plans to adopt smaller current account deficits. Given the stimulative monetary policy of the BoC, higher-than-expected GDP growth, over-performing labour market, steady inflation, and positivity in the US-China trade war, the probability of the Bank of Canada cutting rates in their next announcements appears unlikely. Federal elections are also expected to have little impact until the fiscal budget is announced. Currently, the USDCAD forecast is projected to reach 1.31 by year-end.

Oil Prices

Following a weak month, crude oil prices surged 2.54% on Friday October 11th. The increased oil prices are a result of a 2-missile strike on an Iranian oil tanker near Saudi Arabia. Oil prices are expected to continue to rise into December as OPEC plans to cut supplies in response to the crude glut and deceleration of economic growth—both weighing on oil prices and consumption. Currently, OPEC is awaiting the compliance of Gabon, Nigeria and Iraq ahead of its December meeting, which is expected to provide support for oil prices as 1.2 million barrels-per-day are cut from supply by March 2020. Analysts will continue to watch oil demand as weak September economic data from the US and Eurozone has hindered crude oil prices. However, further positivity from the US-China trade war will likely provide support for oil prices as sentiments improve in anticipation of economies returning to accelerated growth and increased consumption.

FX Forecast Table