Canadian Dollar Monthly Outlook: December, 2017

Economic Outlook and Summary

November’s Bank of Canada rate decision outlined a cautious, data dependent approach to future monetary policy tightening. Of primary importance are inflationary and employment data. The unemployment rate has declined to 5.9%, the lowest in nearly a decade, an indicator of labour market strength. However, inflation continues to lag behind the Bank of Canada’s target of 2-3% annually. Canada has seen an impressive pace in its Real GDP growth, resulting in a rise in the Loonie towards the end of the month.

Markets are assessing the likelihood of an interest rate hike in the U.S. in December as a near certainty, which is currently priced into USDCAD. NAFTA talks had yielded no progress for the month of November, creating additional uncertainty surrounding exports. However, talks of a possible

Recent data from the major Canadian financial institutions indicate expectations of a rising USD as the U.S. approaches on the approval of the President’s proposed tax cuts. Most of these banks have updated their figures reflecting a moderate increase from the past months outlooks.

Oil Prices

The United States continues to be a growing player in global oil and gas markets, as reports estimated showed shale-oil surge to have output at 9 million . Currently Crude Oil is trading at the mid $57 level, at the end of the month of November; WTI hit near a 2-year high through the month at the $59 mark. WTI is expected to see a potential price boost, as OPEC made the decision to extend its oil output restrictions nine more months, lasting until the end of 2018. The OPEC decision can potentially allow for the commodity-sensitive Loonie to advance in value.

The Canadian Dollar and Bank of Canada

Although the Canadian dollar could extend gains made following the Bank of Canada’s second rate hike this year, the dollar remained relatively stable in November. Investors are pricing a 30% probability that the Bank of Canada moves again in January 2018. Large minimum wage increases and  new mortgage regulations will leave the economic economy with uncertainties..

Recent optimism concerning the Canadian labour market is a positive for the Bank of Canada moving towards the next calendar year. Overall GDP growth has been very solid throughout 2017, however inflation is still below BoC-mandated levels. The Bank of Canada is poised to build on the two rate hikes made in 2017 next year.

The USD and the Federal Reserve

Overall, 2017 has been disappointing for the US dollar, and 2018 could see a further decline in the greenback against overseas currencies. November saw this trend continue as the downward trend of the US dollar lost more than 1%. The FOMC will be looking to further tighten monetary policy next year. A soft US current account leaves the dollar dependent on capital inflows. Corporate tax cuts might lend short-term strength to the US dollar, but in terms of interest rates the value of the dollar will look less overwhelming. Hence, this leads to a further US dollar depreciation in the upcoming year

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