April 26th 2023, 2:03:34 pm
(about a month ago)
FX Forecast March 2023
• For information purposes only
USDCAD Q1 23
Following the continued hawkish message from the US central bank in their latest meeting in early Feb, the market continued ignoring the Fed's determination to fight inflation, and stocks and bonds both rallied. The good economic data, however, which was bad news for the markets showed that the US economy is doing fine and can withstand higher rates and inflation is still running hot.
The staggering US job report showed much higher than expected hiring and unemployment falling to a 50-year low of 3.4%. The inflation reports also came in at 6.4% being higher than forecast. Overall, the US central bank has the room to increase interest rates.
The higher rates, standing at 4.74%, support the US dollar as seen in the DXY index, which is measured against a weighted basket of major world currencies. DXY was reaching lows of around 100 which turned around after decent economic reports and in turn the possibility of higher US interest rates. The index is standing at 105.2.
The higher rates however will put pressure on real and financial assets. The mortgage rates are at record highs and financial asset prices are depressed. The possibility of the US economy entering into recession is however still low.
The strong US dollar is expected to soften in the second half.
Bank of Canada increased the rates to 4.5% and called an end to the interest rate increases. The high household debt mostly led by housing prices limits the ability of the Canadian central bank to freely hike rates without risking barking the economy.
The different nature of the mortgage system in Canada compared to the US, means a higher portion of households have variable mortgage rates and feel the pain of higher rates more directly. Bank of Canada governor already noted that the households are going through a tough time with the higher rates.
Nevertheless, Canada is 0.25% behind the US on interest rates. If the gap widens, meaning the US central bank continues with its rate hikes, the global capital flow will find its way out of Canada, putting pressure on the Canadian dollar.
The good economic data coming from the US showed paved the path for the US Fed and higher divergence between Canadian and US interest rates. As seen, the Canadian dollar weakened out int the second half of February and now the higher band of the forecast shows 1.39 against USD at the end of March. CAD was standing at 1.28 against USD a year ago.
The commodity prices and oil in specific has been soft recently and not providing the support expected for the Canadian dollar either.