FX Forecast April 2023 – Carry game continues.

For information purposes only

·       USDCAD Q2 23

·       Median 1.34

·       Mean 1.35

·       High 1.40

·       Low 1.30

·       Forward 1.33

Economic update and US dollar

The US Federal Reserve increased the interest rates by another 0.25% to 5.25% and mentioned that it would pause the rate hike for now. Canada kept the rates at 4.5% to lag the US policy rate by 0.75%. Canadian inflation is in fact lower with core inflation standing at 4.3% in April against 4.6% in the US.

The US and Canadian economies are showing signs of slowing down and markets are pricing in a high chance of a recession in 2023 following the aggressive interest rate hikes but are surprisingly strong. The inflation slowing down but relatively sticky and the Job market is super resilient with US and Canadian employment at 50-year lows.

The ultra-low unemployment rate in US and Canada means the households can keep their jobs and the higher interest rates which are causing higher mortgage, car, and student loan payments are still manageable. The strong COVID-era saving with a strong job market will undermine the power of high-interest rates to control inflation as fast as central banks preferred to see. This means the interest rates may have to stay higher for longer to effectively depress demand and push inflation in developed nations including US and Canada to the 2% target.

Meanwhile, the regional banking crisis in the US is putting pressure on the US lending condition and the Central bank may have to lower rates in the near future faster than they would like to. They may have to decide between the stability of the financial markets or controlling inflation.

In Canada, however, the central bank may have to further increase interest rates in 2023 as the data from the housing sector shows the prices have bottomed and the housing indices in fact advanced in March. Both housing prices and rent prices are continuously increasing. The trend may not help the inflation not go back to the 2% target.

The US interest rate is higher than half of the countries in the world right now and the ultralow environment seems to be over. Investors are increasingly looking for sources of return and high-interest rates offered on a traditional guaranteed savings account are attracting a lot of investments. US-nominated investments are hence absorbing a great deal of FX currencies as long as the markets believe that there will not be any reduction in interest rates or other currencies offering a more attractive carry. Other regions like Europe are catching up with ECB expecting to deliver two more rate hikes of 0.25% in 2023. The policy catch-up has pushed EUR higher against USD.

Canada meanwhile was depreciating against USD on the 0.75% rate differential but the surprising 1 million barrel-a-day oil production cut by OPEC moved oil prices higher and provided support for the Canadian dollar. The oil price eventually moved back down throughout April with the concern over the economic recession. Still, forecasts are expecting oil prices of around $100 in 2023.

 The support for the Canadian dollar is fading and forecasts edged lower for CAD against the US. If the Bank of Canada decides to continue the rate hike or US central bank decides to cut the rates sooner than their plan due to the banking situation, CAD could move higher against the US dollar.