FX Forecast October 2023 – War could be more supportive for USD and CAD

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• USDCAD Q4 23

• Median 1.35

• Mean 1.36

• High 1.40

• Low 1. 30

• Forward 1.37

After the US and Canada left their interest rates unchanged in their last Central Bank meetings at 5.5% and 5% respectively, the markets started to see signs of inflation creeping back up on the back of higher energy prices. US inflation edged up to 3.7% from the low of 3% reported two months ago and Canada reported 4% for August vs. 2.8% two months ago.

On top of that, the resilient job market in both countries is pushing markets to believe that officials may have to keep the rates at high levels for an extended period of time. The US jobless claims remain at very low levels, similar to pre-pandemic and unemployment is at a record low of 3.8% in the US and 5% in Canada.

In Fact, the forward guidance on US and Canadian rates is showing less chance of any rate cuts in 2024 and even a higher probability of another 25 bps interest rate increase by the end of 2023.

With interest rates staying higher for longer in the US and Canada, investors’ cash can earn competitively higher rates in the US and Canada compared to other nations. The rates are so high that are competing with very high rates that are traditionally expected from Emerging Markets like Brazil. So, it is inevitable to see money flowing in USD and more strength for the Greenback.

The verdict has been that USD deprecation is inevitable at some point as it has crushed all the other currencies for such a long time. For that, we need to see the US rates come down which at this point the only reason could be a hard recession which is not probable. Even in that case, the US dollar acts as a safe haven and could remain unequivocally strong.

All in all, the US dollar reign doesn’t seem anywhere to be over.

Oil and war

The Canadian dollar has a weaker stance with higher inflation and a less favorable environment compared to USD but still has kept up pretty well compared to other world major currencies like EUR and JPY against USD. The major factor has been the oil prices which is a major support for CAD. Currently, USD is trading at 1.37 CAD and is expected to even go higher.

The cherry on the top is the oil prices that managed to move over $90 a barrel again and then the war that broke out in Israel putting the bet to control oil prices at stake. In the light scenario US could restrict oil exports by Iran which is the main supporter of the group that attacked Israel. In a more severe scenario, Iran could disrupt the Strait of Hormuz which is the artery for 17 million barrels a day oil shipment.

The higher oil and energy prices could be detrimental to the effort of central banks to fight inflation and evaporate the hopes to see monetary policy easing and potentially lower interest rates in 2024. But could provide support for the Canadian dollar and prevent any further depreciation against USD.

The forecast for this month expects Canadian dollar to remain around the same levels after depreciating last month against USD.