Economic Outlook and Summary
May began with fresh US regional banking fears more US regional bank shares tumbled and the market believed the Fed would be forced to cut rates sooner and faster than previously expected.
Those fears faded quickly and were replaced by the US debt-ceiling crisis. Treasury Secretary Janet Yellen warned that the country would default on its debts by June 1, which if allowed to happen, would throw the global financial system into chaos.
That theme permeated risk sentiment for most of the month before sticky inflation data, robust US nonfarm payrolls data, and injected Fed monetary policy uncertainty into the mix.
Bonds, stocks, and the US dollar traded erratically with every headline and rumour, before a deal was reached on May 27.
Elsewhere, the European Central Bank raised its benchmark rates by 25 bps as expected and are widely expected to repeat the process on June 16. The Bank of England hiked its overnight rate to 4.5% and analysts believe another 50 bps of hikes are in the pipeline.
The USD and Federal Reserve
The US dollar started the month defensively after the debt ceiling deal led to long dollar positions being unwound.
It was a short-lived move thanks to a series of robust economic reports. May and June NFP data were far stronger than expected and inflation remained elevated. Traders and analysts thought it would be prudent to revise their Fed monetary policy outlook to one more closely aligned with Fed Chair Jerome Powell’s outlook. The market is no longer pricing 75-100 bps in rate cuts by year end like in May and now believes there is a less than 50% chance that the overnight rate will be lower than the current 5.0-5.25% target.
In light of the June 2 employment report's upside surprise, many expect a 25 bps rate increase on June 14. In addition the FOMC releases an updated Summary of Economic Projections.
The Canadian Dollar and Bank of Canada
The Canadian dollar swirled and churned in a maelstrom of shifting US risk sentiment due to economic data and debt default fears.
Canadian inflation ticked higher in April on the heels of a strong employment report which raised the risk that the Bank of Canada would hike rates at its June meeting. It happened.
The BoC increased its benchmark rate by 25 bps to 4.75%. The statement said that monetary policy was not sufficiently restrictive to bring supply and demand back into balance and return inflation sustainably to the 2% target.
The Canadian dollar rallied on the move, but the gains were minor as the focus shifted to the prospect of a hawkish outcome to the June 14 FOMC meeting.
USDCAD has support at 1.3260, the 2023 low and resistance at 1.3660.
Oil Price
West Texas Intermediate is having a conundrum. Prices hit $63.64/barrel on May 4 due to data suggesting the Chinese economy was weaker than expected, Fed rate hikes, and lingering month end portfolio rebalancing flows. Prices chopped about in a $67.60-$74.60/b range before ending the month at $69.53. Saudi Arabia’s unilateral decision to cut production by 1.0 million barrels per day beginning in July appears to have put a floor under prices for the time being.
Forecast Table - USDCAD
Bank 2023-USD/CAD Q3 2023-USD/CAD Q4
Scotiabank* 1.30 1.30
BMO 1.34 1.32
CIBC 1.34 1.32
TD Bank* 1.35 1.35
National Bank 1.36 1.38
*Forecast is based on last month. Forecast Table is for mid-market rates, and subject to change anytime.
