Canadian Dollar Forecast for May 2018, Oil Rally helps Loonie

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WTI oil prices have climbed from 66.85/barrel to $71.86/barrel since the beginning of May. Canadian dollar traders largely ignored the oil price rally, content to focus on expectations for a widening of Canada and US interest rate spreads.

“The Canadian dollar soared thanks to a renewed focus on oil prices.”  Said Rahim Madhavji, President of KnightsbridgeFX, a currency exchange company that helps Canadians get better exchange rates than the banks.

President Trump shifted the focus on May 8, when he took the United States out of the Iran nuclear deal and said he would put the original Iran sanctions in place.  Concerns of an oil supply disruption from the loss of Iran’s production lifted oil prices.  Prices increased further on fears of heightened tensions in the Middle East, particularly between Iran and Israel.  Those fears were validated overnight. 

The Canadian dollar extended yesterday’s gains.  USDCAD plunged from 1.2857 to 1.2776 and opened in Toronto just above that level.

Economic Outlook and Summary

The Canadian Dollar in the month of April showed promising signs of strength alongside its U.S. counterpart which did show strong movement in this past month. The Bank of Canada (BOC) decided to keep interest rates unchanged at 1.25% in the past month, but kept its dovish tone as it produced unfavorable yield results, with this current economic condition, projections of a possible rate hike for the end of May by the BOC have increased significantly, which could result in a rise for the Loonie. April showed for the ongoing NAFTA negotiations to be slightly stalled as U.S President Donald Trump extended the deadline to reach a deal with Canada. The weakness in the Canadian Loonie fell with the rising U.S yields which favored the U.S economy showing its current economic strength while putting any Canadian growth in the rear-view mirror for the time being. As mentioned NAFTA is still showing vast uncertainty as lawmakers are pushing for progress in the next month. With a positive outcome this may benefit the Canadian economy and give a boost the commodity-based Loonie.

The US economy showed a strong showing for the month of April, this being backed by the strong economic data releases showing that Q1 U.S. GDP figures grew at 2.3%.  This however also gave rise to the Federal Reserve Bank to stick with its more aggressive tone on monetary tightening.  The Fed has also left its rate steady at 1.5-1.75% from the past month, this however is expected to increase soon as its current economic level is very strong including the labour market, which has resulted in the creeping of inflation, being a big factor into the decision to have a potential rate hike in the near term with a possibility as coming as soon as June. There are concerns with the ongoing policy tightening that it may risk showing an inverted yield curve which is something that the Fed is not looking to do as in the past it has led to previous recessions.  The U.S. economy has been showing positive growth in the past month as it will look to hold this stability, these factors will be showed in the results of the upcoming Fed meeting with their decision on any upcoming rate hikes.

Recent data being released by major Canadian Financial Institutions has indicated the expectation of the Canadian economy to gain some future strength again with stronger oil prices and an improved economic outlook. Most institutions have updated their figures reflecting in a slight alteration, showing potential economic stability in the Canadian economy and a potential for U.S growth through the mid-year as it has been showing signs of a strong economy.

The Canadian Dollar and Bank of Canada

The Canadian dollar was clearly an underachiever in Q1 as it seemed to be in free fall for a while, but the currency rebounded as it barely squeezed out a minimal gain against a USD that strengthened against all other major currencies. Rising US yields have driven the US-Canada rate differentials towards the USD’s favour. However, we do expect growth to pick up as there will be interest rate hikes from the Bank of Canada that will likely take place. The probability of a Bank of Canada rate hike on May 30th has increased, so expect the Bank of Canada to look for a more moderate tightening policy this year. The loonie’s projected outlook in the near-term remains clouded as NAFTA talks weigh heavily on the Canadian dollar, as a positive outcome would lift the dollar. There are still higher expectations for the longer run outlook as many anticipate the USD/CAD rate ending 2018 at 1.25.

The USD and the Federal Reserve

Over the past few weeks we have seen the US dollar improve significantly. US yields have risen to help support the USD even though it has held a weaker relationship with higher domestic interest rates. This unexpected rebound has put the US economy back on track to grow about 2.8% in 2018. This should make up for a relatively large output gap this year and allow for upward inflation pressures. At the moment the economy is in good shape with a strong labour market, federal personal tax cuts and low interest rates that are all positive for consumers. However, protectionist measures from the trump administration could come with unfavourable consequences for business and consumers. Higher prices for imported goods may hurt consumers, while jobs in the export sector could be at risk. As a result, the federal reserve is focused on monetary policy tightening. The next fed hike is expected in June followed by one more in September. It is hopeful that amidst these monetary policies tightening the US yield curve does not invert.

Oil Prices

Oil showed to have another bullish run throughout the month of April, leading to the month-end to its commodity-linked currency the Canadian Loonie. The month of April showed us a much stronger tone surrounding the oil markets.  Oil inventories saw a decline and pushed the price to a high in and around the $70 mark, currently WTI is sitting at a high $69 mark. U.S shale production has been increasing which has been putting a cap on their prices, showing that there will be an increase in any future supply. As these commodity prices continue to hold strong it may provide the Loonie with some positive strength moving into the future months.

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

Learn how KnightsbridgeFX can help you save up to 2% when buying or selling US dollars compared to your Canadian bank’s rates – click here to compare bank rates