Economic Outlook and Summary
During the month of October, the Canadian dollar and economy showed slight disappointment with the new United-States-Mexico-Canada Agreement (USMCA) being finalized last month. This had been as a direct result from the weakness of the USMCA and some stronger labour data being released for the month of September showing volatility from previous months of an increase in jobs of 63K, causing the unemployment rate to drop to 5.9% alongside growth in August Gross Domestic Product. The Bank of Canada (BOC) has also stayed on its current hawkish tone on the commodity based loonie as it had raised its overnight rate by 25 basis points to 1.75% in October. With the USMCA settled the BOC has also hinted at the possibility of a rate hike as the year comes to an end and in the upcoming year as it continues its monetary tightening policy.
In the month of October, the U.S economy showed to gain some strength in comparison to the loonie as mentioned with the USMCA agreement finalized, and stronger economic data being released through the month. U.S Q3 GDP results came in stronger than expected with 3.5% growth and labour statistics also came in above analyst projections pointing to a strong economy lowering the current jobless rate to 3.7%. The Federal Reserve Bank (Fed) is proceeding with gradually normalizing its current monetary policy. The Fed is still also projected to raise interest rate once more before the new year, with a possibility of three more hikes coming after the new year. With the current strength of the U.S. dollar, there are some signs of the weakness in the U.S which are shown by some of the ongoing trade tensions between China and the European Union, in which once are settled will have a clearer outlook for the U.S economy.
Recent projections by major Canadian financial institutions have indicated an improved outlook of the Canadian economy once again as compared to the previous month. U.S. strength has been substantial over the past couple months with labour and employment figures leading the way as the Fed believes the economy is strong and is trying to aggressively stay on top of its current monetary policy. Most of these institutions have updated their figures as it may be seen in the chart below and is showing potential economic stability in the Canadian economy as the current year is coming to an end.
The Canadian Dollar and Bank of Canada:
The loonie struggled significantly in the month of October as the U.S. dollar remained relatively strong. The Bank of Canada raised the overnight rate by 25 basis points in October, which could lead to signs of a more aggressive approach to monetary tightening. Although rate spreads were improved the loonie did not respond well due to capital inflows weakening through October. Part of the loonie’s low performance is due to lower Canadian oil prices. However, there is some optimism in the near future as rate spreads could improve in the Canadian dollars favour as we do expect the USD/CAD rate to reach $1.27 by the end of 2018.
The USD and the Federal Reserve:
The trade-weighted U.S. dollar continues its uptrend by gaining more than 1% in October. Risk aversion did help strengthen the greenback during the month. We expect the Fed to recognize the threat of GDP growth and hence reconsider its protectionist measures. Also, positive economic data was released in October which did help the greenback and improves signs of a potential December interest rate hike. However, there is less optimism for the U.S. dollar in 2019 in terms of GDP growth, which means we could see a decline in the number of hikes we see in comparison to 2018. Another reason to feel nervous about the U.S. dollar is due normal dollar appreciation and rising inflation since the start of the year. This decline will eventually impact American exporters.
Oil Prices
In the month of October, oil prices showed strong momentum as U.S oil powering its rally but had U.S sanctions on Iran slowly creep in as the price of WTI stood around $75. Through the month, the Organization of the Petroleum Exporting Countries is also expected to increase oil production per day 30,000 barrels per day as Saudi Arabia is also looking to fulfill any oil demand from current Iran sanctions that have been placed by the U.S and will influence global supply, as the commodity linked loonie may lose some traction as prices fall. There are signs of volatility in oil prices was surrounding trade tension with the U.S and China which did lead to the downward trend through the month. Currently, the price of WTI is sitting around a low $61 level as it ended the month in a significant downtrend. We can continue to watch the price of oil as its continual rise will result in a boost for the commodity-linked Canadian loonie.
Rahim Madhavji is the President of KnightsbridgeFX.com, a Canadian currency exchange that provides better rates than the banks to Canadians
