FX Monthly Forecast: US Dollar Remains Undisputed

USDCAD Q2 2024

Median: 1.37
High: 1.40
Low: 1.30
Forward: 1.37

The month of April proved to be even more eventful than March, both economically and geopolitically, with all forces aligning to maintain the crown on the undisputed US dollar. Rising tensions between Iran and Israel propelled energy prices higher, prompting investors to seek refuge in safe-haven currencies, with the USD at the center. Furthermore, the US economy continued to exhibit robust labor and GDP growth, coupled with an inflation report hotter than forecasted, pushing projected interest rate cuts further back.

The DXY index, which gauges the strength of the USD against a basket of other major world currencies, stands at a year-to-date high of 105. The robust US dollar surged even higher as other major central banks were believed to be considering faster interest rate cuts compared to the US, exemplified by the Swiss National Bank cutting rates by 25 bps to 1.5.

Initially, the US Federal Reserve was anticipated to lower rates three times in 2024 by 25 bps each, but current projections suggest that rate cuts might not materialize even once this year. In their May meeting, the US Fed opted to keep rates unchanged, with Fed Chair Jerome Powell emphasizing the need for more time and evidence before considering rate reductions.

The latest US inflation data surpassed expectations, coming in at 3.5% compared to the previous month's 3.2%. It is evident that markets are adjusting to the prospect of higher rates persisting longer, while the US economy demonstrates resilience and equity markets meet earnings expectations. For bears, there's little to complain about!

US Dollar Direction

The world's most prominent FX is offering a 5.5% risk-free rate and has maintained its strength against every other major currency for the past two years. This situation is compelling more investors to cease speculating on other FX and opt for the cash rate on USD.

The capitulation on other FX bets is evident, as seen in the Japanese Yen, which surpassed 160 against the USD for the first time since the 1990s. Similarly, the UK sterling and Euro also fail to offer sufficiently promising prospects.

The US economy is transitioning from a soft-landing scenario to a no-landing scenario, indicating continued growth with inflation remaining above the 2% target, to which markets are adjusting. Rates are likely to remain higher for longer, and the US dollar offers a favorable carry trade compared to high-carry emerging economies, including Brazil and Mexico. At this point, there is minimal chance of the US dollar weakening for the remainder of 2024.

Canadian Dollar Direction

The Canadian dollar has remained relatively strong against the USD, with commodity prices providing support and the spillover effect of proximity to the United States. Unlike the last US inflation report, Canada saw inflation better than expected, reinforcing the view that Canada may lower rates faster than the US.

The Canadian economy has exhibited signs of weakness, contracting last month, compounded by a housing crisis and higher unemployment rates. The Bank of Canada is likely to deliver at least two rate cuts by year-end, sufficient to weaken the Canadian dollar against the US dollar. The policy interest rate currently stands at 5% for Canada. USD is presently trading at 1.37 against CAD, at the higher end of forecasts, and could appreciate further in 2024.