Economic Outlook and Summary
The month of May saw the Canadian Dollar and Economy move slightly downward as the month began with a strong start as oil had been on a surge to highs not seen for months linking it with the performance of the commodity linked loonie. The Bank of Canada (BOC) decided to keep interest rates unchanged at 1.25% in the most recent meeting as it offered a watchful tone with the current economic uncertainty surrounding the trade policies with the United States (US). However the BOC hinted at a potential rate hike for the month of July which has been factoring into the market. Mid-May saw a downward pressure on the loonie as reports confirmed that Canadian employment data came in under analyst expectations showing inflation steady at 5.8%, including a net change of employment for April down 1.1 K. This downward pressure was linked with unfavorable yields relative to the US which offset any further rises in oil prices.
Negotiations went on during the month of May in terms of the ongoing NAFTA deal, this has resulted in a strain on the Canadian loonie and the potential outlook as some terms have already been denied causing a stall and uncertainty of the potential trade agreement. A potential agreement on the current NAFTA deal would bring with it a stronger Canadian outlook and show a potential rally in the commodity linked loonie.
The US economy started the month of May off on upbeat US economic data, showing US GDP Q2 figures rising and giving a boost to the greenback currency. May saw the current economic state reflect in the greenback currency dipping lower, these results were linked to US President Donald Trump’s decision to withdraw from Iran nuclear deal and impose them of sanctions causing some political and economic uncertainty in turn to the volatility of the greenback during the period. The Federal Reserve Bank announced that it is in no hurry to change interest rates, but stayed firm on the forecast of potential hikes throughout the year as it continues to let inflation run its course and continue with its aggressive tightening process. By the end of the month there is some economic and political uncertainty revolving around the US, sparking further fears of a potential trade war as the G7 group are heading into meeting to discuss possible negotiations. This uncertainty has been causing much uncertainty in currency markets including the ongoing NAFTA negotiations.
Recent data being released by major Canadian Financial Institutions has indicated a mixed expectation of the Canadian economy to gain some future strength with stronger oil prices and improved economic outlook. However US strength has been substantial over the past month. 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 mid-year with much uncertainty still surrounding NAFTA this will play a key role in the direction of the future economic outlook.
The Canadian Dollar and Bank of Canada:
The Canadian dollar lost significant ground against the USD in May. As the USD/CAD rate crossed over at 1.30 there were hints by the Bank of Canada for a July interest rate hike. After announcements of trade policy and housing discussed by the Bank of Canada in the last week of May, the loonie gained a cent to improve just a little after a very weak month. Rising price pressures have gotten the attention of the Bank of Canada with wages and oil prices on the rise. Expect the loonie to appreciate against the USD as the Canada-US yield spreads are predicted to improve in the coming months.
The USD and the Federal Reserve:
The month of May started well for the US dollar as impressive US economic data boosted the trade-weighted USD to its highest point since last July. Throughout May there were notable stints of USD strength which were tied to the fed’s tightening of monetary policy. However, we do expect the greenback to trend lower due to diverging monetary policies that are expected to take place at some time. As the economy is in a good place at the moment, the fed’s are in no rush to tighten rates. The US dollar’s recent rebound comes at a time of market uncertainty and political concerns in Europe that have allowed the greenback to appreciate over the month. The fed’s abilities to tighten policy is restricted to a weak yield curve and it is believed that the fed funds rate could be at neutral. Hence, the US dollar’s momentum is not expected to last because of diverging monetary policy.
Oil Prices
Oil showed to have a very bullish run throughout the month of May, which led to slightly weaker month-end. The month of May saw bullish momentum reaching highs of around $71, not being reached in around 4 years. Much of this buying pressure came as the US withdrew from the nuclear deal with Iran and announced sanctions on the third largest OPEC exporter. This news caused Russia and Saudi Arabia to consider increasing oil supply by 1 million barrels per day, as Venezuela's current economic crisis with potential supply shortfalls may occur. However OPEC stated the current agreement will continue to the end of 2018. Currently the price of WTI is sitting at around a high $65 level. If oil prices continue to rise it may result in a positive movement with the commodity linked loonie.
