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FX Monthly: Economic Outlook and Summary

May was all about the Fed’s interest rate outlook—"Will they or won’t they" after the May 1 FOMC meeting. Fed Chair Powell maintained that rate decisions would be data-dependent but added that he thought the next move would be a rate cut. Fed officials played a large role in setting market sentiment, especially Cleveland Fed President Neel Kashkari who warned that Fed rate hikes were still on the table. Other policymakers such as Cleveland Fed President Loretta Mester and Governor Christopher Waller repeatedly provided reasons for why the Fed needed to leave rates in restrictive territory and why the Fed was in no hurry to ease monetary policy.

Elsewhere, in the UK, Prime Minister Rishi Sunak called a snap election for July 4, which managed to shove Bank of England monetary policy and economic data to the back burner as traders focused on FX risks from a Labour Government.

All of these events occurred against an elevated geopolitical risk environment. Israel and Hamas ceasefire talks were mostly political noise, while China stepped up its bully tactics against Taiwan. NATO leaders are talking about the need for a bigger role to support Ukraine against Russia’s invasion and the US is stepping up targeted sanctions on Chinese tech firms.

The USD and Federal Reserve

The US dollar index DXY opened at 1.0620 on May 1 and never saw that level again. The DXY traded erratically and with a negative bias, closing the month at 104.60. The catalyst for the choppy price action was US economic data and Fed speak. Things got really exciting in the middle of May when April CPI, both headline and core, ticked lower. The release of the FOMC minutes on May 22 revealed policymakers remained very concerned about inflation, but investors did not seem as bothered. The S&P 500 finished May with a 4.80% gain fueled by falling Treasury yields. The 10-year Treasury yield fell from 4.68% at the open on May 1 to a mid-month low of 4.31% but erased the entire move.

The Canadian Dollar and Bank of Canada

The Canadian dollar traded choppily in a fairly narrow range but with an underlying bearish bias because Bank of Canada Governor Tiff Macklem broadly hinted that a rate cut was likely at the June 5 meeting. That outlook was confirmed on May 21 when Statistics Canada confirmed that inflation cooled modestly in April. For the rest of the month, Canadian dollar direction was at the mercy of US economic data and Fed policymaker comments. Mr. Macklem followed through with his hint and cut rates by 25 bps to 4.75% on June 5.

Oil Price

Oil prices were range-bound in a 76.60-80.65 range for the entire month with concerns about slowing growth and lower demand offset by existing OPEC and friends production cuts. Fears of supply disruptions from the Middle East faded after Israel’s measured response to Iran’s attack failed to escalate tensions. OPEC stuck to its view of rising demand in the second half, but the International Energy Agency’s forecast was for lower demand. At the beginning of June, OPEC announced plans to phase out some production cuts starting in October, and WTI tumbled to $73.25/b

Bank 2024-USD/CAD Q2 2024-USD/CAD Q3

Scotiabank* 1.3800 1.3800

BMO 1.3700 1.3500

CIBC 1.3900 1.3800

TD Bank* 1.3900 1.4100

National Bank 1.3800 1.4000

*Forecast is based on last month. Forecast Table is for mid-market rates, and subject to change anytime.