Economic Outlook and Summary
The US dollar will remain the major focus in January and set the tone for the other G-10 currencies. Concerns about the economic impact from COVID-19 and its Delta and Omicron variants dominated financial markets in 2021 and those concerns are top of the agenda at the start of 2022, along with inflation. Federal Reserve Chair Jerome Powell said it was time to retire the term “transitory” to describe inflation and policymakers have shifted concerns to preventing high inflation from becoming entrenched.
The USD and Federal Reserve
The Fed adopted a somewhat hawkish bias at the December 15 meeting which was punctuated by the dot-plot forecasts in the Summary of Projections. Policymakers now believe the Fed will raise interest rates three times in 2022. The Fed also revealed that not only would pandemic quantitative easing end in March, but quantitative tightening (balance sheet reduction) would start far sooner than expected. More details are expected at the January 26 FOMC meeting.
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The Canadian Dollar and Bank of Canada
The Canadian dollar is expected to strengthen in January, buoyed by rising oil prices and higher interest rates. The Bank of Canada is widely expected to increase interest rates in March. However, some analysts expect lift-off in January, with the overnight rate rising to 0.50% from 0.25%, which will have a higher probability if the December inflation level is above November’s 4.7% y/y result.
On the other hand, Ontario and Quebec have re-enacted harsh measures to combat the spread of the Omicron variant. Indoor dining has been cancelled, large gatherings curtailed or banned which, if prolonged, may impact domestic growth. BoC policymakers may be loathe to tighten in the face of that uncertainty.
Traders may get better insight as to the BoC’s intentions after the Business Outlook Survey (BOS) is released. Analysts will be keen to see if businesses are downgrading their growth expectations.
Canadian inflation is running hot with November posting a 4.7% y/y gain, which is well above the BoC’s 2.0% target. A higher than expected inflation reading may overshadow Omicron fears and force a January rate hike.
Oil Prices
In December, Opec and the International Energy Agency (EIA) expected Omicron outbreaks in many countries would slow the recovery in global oil demand. Even so, JP Morgan analysts said that the under-investment in oil infrastructure means oil demand will outstrip supply and WTI could rise to around $120.00/barrel.
Forecast Table
| Bank | 2022-USD/CAD Q2 | 2022-USD/CAD Q3 |
| Scotiabank* | 1.21* | 1.20* |
| Bank of Montreal | 1.26 | 1.25 |
| CIBC | 1.30 | 1.32 |
| TD Bank* | 1.23* | 1.23* |
| National Bank | 1.20 | 1.22 |
*Forecast is based on last month. Forecast Table is for mid-market rates, and subject to change anytime.
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