USD/CAD - FX Outlook August 2018

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Economic Outlook and Summary

During the month of July, the Canadian dollar and economy rose slightly, as the month showed unchanged interest rate spreads with United States (U.S.). The Bank of Canada (BOC) raised its interest rates by a level of 0.25% now sitting at the current level of 1.50%, which was factored into market conditions for the Canadian economy. Concerns with the North American Free Trade Agreement continuously showed on the downward pressure of the loonie and economy as negotiations are still been very unclear to whether there will be a potential trade agreement in the near future, however, they have stated they will continue talks in the near term. If negotiations become clearer this will result in the appreciation of the Canadian dollar and economic outlook, which would also continue down the path of the BOC tight policy tightening. The month ended off with concerns arising with some political backlash with Saudi Arabia instructing overseas asset managers to sell off their Canadian holdings resulting in a decline of the loonie, with future impact yet to be priced in and analyzed.

The U.S. economy held a good standing for the month of July as the Federal Reserve was staying firm on tightening its monetary policy. The Fed also decided to leave the current fund rate unchanged at the current level of 1.75-2.00%, however, the bank was hinting at a potential hike in the near future as the economy is still going strong and the greenback is factoring the next hike into current market conditions. Projections of the U.S economy are showing that growth is currently on track to its Q4 level of 3%. The end of the month posted the U.S labour market creating 215K job per month on average for the first seven months of 2018, while the jobless rate showed a level of 3.9%. With these strong results, the U.S is still showing great strength and has resulted in the Fed to maintain its hawkish tone towards its current monetary policy.

Recent data being released by major Canadian financial institutions has indicated a better outlook of the Canadian economy than the previous month. However, U.S. strength has been substantial over the past month with labour statistics leading the way. Most of these institutions have updated their figures reflecting in a moderate alteration, showing potential economic stability in the Canadian economy and a potential for U.S. growth through the short-term with much uncertainty surrounding NAFTA as talks progress.

The U.S. dollar and the Federal Reserve:
After consecutive monthly increases, we saw the U.S. dollar decline more than 1% against the Canadian dollar in the month of July. Although the U.S. dollar did take a fall, there are speculations of a rebound where the greenback would capitalize on more favorable interest rate spreads from tightening of U.S. monetary policy. A September rate hike is almost fully priced in by markets, but expect to see the U.S. dollar get an additional boost in August due to a strong economic outlook and protectionism. This momentum is not expected to last long term as there are speculations of a weaker USD for 2019 as rate differentials will fade and reverse as other major central banks tighten policy.

The Canadian dollar and Bank of Canada:
The Canadian dollar did rebound against the U.S. dollar in the month of July to gain 1%. The forecast for the loonie to appreciate after Q3 is based on a trade deal being reached by Washington and Ottawa which may not happen until next year. However, if a trade deal were to be reached this year, the Canadian dollar’s appreciation could be significant. If this were to happen then all trade related uncertainties would end which would improve the economic outlook. This would increase odds of policy tightening by the Bank of Canada and improve the Canada-US interest rate spreads. With the fed hiking by 125 bps over the coming six quarters, expect the USD/CAD rate to range between 1.25-1.35 for the next 12 months.

Oil Prices

Oil prices started the month of July gaining momentum as expectations of WTI oil supply shortages kept the price of WTI at $75 level. Throughout the month of July, concerns with these oil shortages continues to arise as Venezuela was closing one of its oil refineries resulting in crude oil prices to gaining some traction. Concerns with the U.S. and Iran caused the price of oil to drop to a level of $69 after remarks from the Iranian Foreign Minister confirming that country would continue to export oil as the U.S will continue to halt it. Currently the price of WTI is sitting around the $67 level. We can continue to watch the price of oil as continual rises will result in a boost for the commodity-linked loonie.

Rahim Madhavji is the President of KnightsbridgeFX.com, a Canadian currency exchange that provides better rates than the banks to Canadians