Economic Outlook and Summary
December unfolded largely as expected. Robust economic data, central bank actions, and geopolitical factors served to underpin the US dollar, as did the lingering specter of the incoming Trump administration. The EUR weakened further due to disappointing Eurozone PMIs and a soft economic outlook, with markets anticipating additional ECB rate cuts in early 2025. The Bank of England and Bank of Japan left interest rates unchanged. Although Wall Street closed with losses for the month, the major indexes still finished the year with robust gains. The impact from Canadian and US employment reports due January 10 will be lower than usual due to Trump’s inauguration on January 20.
The USD and Federal Reserve
The Fed delivered a 25 bp rate cut on December 18, dropping its benchmark rate to 4.50% but then announced a more cautious approach to interest rates in 2025. That cautious approach was underscored in the statement with these words: “In considering the extent and timing of additional adjustments to the target range for the federal funds rate, the Committee will carefully assess incoming data, the evolving outlook, and the balance of risks.” And just to ensure that financial markets got the message, the Summary of Projections suggested just two 25 bp rate cuts in 2025, compared to four 25 bp cuts in the September projections.
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The US dollar surged on the news as the Fed’s somewhat hawkish rate outlook contrasted sharply with that of the other major G-7 central banks. The FOMC meeting is January 29.
The Canadian Dollar and Bank of Canada
The Canadian dollar got spanked in December. Donald Trump’s threat to levy 25% tariffs on all imports from Canada, irrespective of the US-Mexico-Canada Agreement on trade (USMCA), fueled a USDCAD rally. The Bank of Canada exacerbated the gains when it cut interest rates by 50 bps and indicated that further cuts were in the pipeline. Finance Minister Chrystia Freeland resigned hours before she was supposed to table the Fall Economic Statement and announce that the projected budget deficit for 2025 was no longer $40 billion but $60.1 billion. Her resignation left the government in disarray and looking totally unprepared to deal with the new US administration. If Trump follows through and slaps 25% tariffs on Canadian imports, the Canadian dollar will flirt with 66 cents to the USD.
Oil Prices
The oil market experienced mixed dynamics, with WTI trading in a relatively stable $67-$72/barrel range. Gains were slowed due to modest production growth, thanks to rebounds in Libya and Kazakhstan. However, bearish sentiment persisted due to weak demand signals from China and the Eurozone, and rising US crude inventories mid-month added further pressure. Brief price spikes from Middle East geopolitical tensions were short-lived, as oversupply concerns dominated market sentiment.
January is seeing a slightly optimistic start. Prices are supported by expectations of stronger demand, with the Energy Information Administration (EIA) forecasting US oil demand at 21.01 million barrels per day, the highest since 2019.
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