Economic Outlook and Summary
Traders were very skittish in March. They went from sheer panic at the prospect of a major US banking crisis to feeling relief in anticipation of Fed interest rates cuts by the summer.
Fed Chair Jerome Powell was at his hawkish best when he testified before Congress and said, “the latest economic data have come in stronger than expected, which suggests that the ultimate level of interest rates is likely to be higher than previously anticipated.” The US 10-year Treasury yield crack above 4.0% and the US dollar rallied.
That same day, Bank of Canada officials delivered as expected, which was nothing. They left monetary policy unchanged saying previous rate hikes needed time to impact the economy.
Then it was revealed that Silicon Valley Bank was hemorrhaging bond losses in the wake of the sharp rise in US interest rates. The Fed, FDIC and the US Treasury came to the rescue. A few day’s later it was the Swiss National Bank orchestrating a rescue fund for Credit Suisse Bank, which was on the verge of collapse.
The Fed hiked rates by 25 bps on March 23, which traders viewed as evidence that fears of a full-blown banking crisis were just a tempest in a teacup. The rate hike was a tad dovish as the dot-plot projections and the tone of Powell’s press conference fueled speculation that the Fed would soon be cutting rates.
The US dollar finished the month on the defensive with traders pricing in a 60% chance of a Fed rate cut by July.
The USD and Federal Reserve
The US dollar ended March with losses across the board while the S&P 500 index gained 3.2%. The US dollar index (USDX) retreated throughout March but its downside may be limited due to significant support in the 100.70-101.30 zone which is the uptrend line from June 2021 and all downside moves since June 2022.
The Fed and traders remain at odds over the prospect of US rates. St Louis Fed President James Bullard is worried that inflation may pick up due to the latest Opec productions cuts. His colleague Fed Governor Lisa Cook is more ambivalent. She sees more tightening occurring but acknowledged inflation is coming down.
The CME FedWatch tool shows traders pricing in a 66% chance that fed funds will finish the year 75 bps below the current 5.0% level. The 3.2% rise in the S&P 500 index suggests equity traders agree.
That will change on April 7 following the US nonfarm payrolls report which is expected to show a gain of 240,000 jobs and average hourly earnings at 4.3%.
The Canadian Dollar and Bank of Canada
The Canadian dollar is riding the coat-tails of global risk sentiment which when positive drives the greenback lower and givers the Loonie a lift. For now, traders are in a risk seeking mood.
The Canadian dollar is a big beneficiary of the market’s view of US interest rates. Forecasts predicting US rate cuts beginning in the summer fueled a sharp narrowing of the CAD/US 2-year government bond spread. It was a large part of why USDCAD fell from a peak level of 1.3860 to 1.3408 on April 4.
Opec’s surprise production cut that was announced at the beginning of April provided additional fuel for the sell-off.
The Bank of Canada is expected to leave interest rates unchanged again when it meets April 12, which is supported by the latest Business Outlook Survey . The BOS showed another drop in sentiment for the first quarter of 2023, due to concerns about cost pressures, and a slowdown in economic growth. Consumers still anticipate that a recession will occur within the year.
Oil Price
West Texas Intermediate rebounded sharply in March and then gapped higher at the beginning of April. West Texas Intermediate rose from a mid-month low of $64.30/barrel and topped February’s peak of $80.80/b on April 4. Saudi Arabia explained the surprise 1.0 million/barrel per day production cut as a necessary move to counter speculation and reduce price volatility. Analysts have rushed to raise oil price forecasts for 2023 to $100.00/b.
Forecast Table USDCAD
Bank 2023-USD/CAD Q2 2023-USD/CAD Q3
Scotiabank* 1.29 1.38
BMO 1.34 1.32
CIBC 1.35 1.34
TD Bank* 1.39 1.39
National Bank 1.39 1.35
*Forecast is based on last month. Forecast Table is for mid-market rates, and subject to change anytime.
