Economic Outlook and Summary -
February was a good month for US dollar bulls and stock market bears. Global risk sentiment soured with escalating geopolitical tensions after China was caught floating spy balloons in US and Canadian airspace. Russian President Vladimir Putin made veiled threats of a nuclear option is available to counter NATO’s arming Ukraine with hi-tech weaponry.
The European Central Bank meets on March 16 and it is universally expected to raise interest rates by 50 bps to 3.5%. That won’t be the end. Bundesbank President Joachim Nagel said as much at the beginning of March. He warned ECB policy must be more stubborn than inflation, and significant hikes beyond March are necessary,
March has plenty of central bank meetings and actionable top-tier data which suggest a choppy, volatile month as trader seek a trend.
The USD and Federal Reserve
The US dollar is back in favour. Economists and analysts expected that the greenback would retreat in the early part of the year as G-10 central banks tighten policy and the Fed slowed the pace of hikes. No such luck.
A series of robust US economic reports in the face of stubborn inflation, and hawkish commentary from Fed officials raises questions as to whether the Fed would hike 25 bps or 50 bps at the March 22 meeting.
Minneapolis Fed President Neal Kashkari has not made up his mind, saying he could go along with either bump. The nonfarm payrolls report on March 10 may be the deciding factor. Analysts are expecting a loss of 35,000 jobs following the massive 517,000 gain in January.
A new Summary of Expectations (SEP) is also available, and analysts will be focused on the “dot-plot” estimates, for a guide to where Fed Funds will peak.
The combination of a hawkish Fed and ongoing geopolitical tensions will limit US dollar downside during this month.
The Canadian Dollar and Bank of Canada
The Bank of Canada decision to pause raising interest rates received some validation after Q4 GDP showed the domestic economy shrank by 0.1% in December. Analysts saw the data as proof that the series of BoC rate hikes and a weaker housing market took a toll on growth.
They could be wrong. Scotiabank’s chief economist warns to not read too much into the data as it is just one report, and the economy still has excess demand and a tight labour market.
The BoC meeting is March 8, and they are expected to leave rates unchanged, as previously indicated.
The Canadian dollar is being tossed about by constantly changing risk sentiment which has USDCAD bouncing inside a wide trading range.
USDCAD is supported by expectations for higher US interest rates as well as safe-haven demand for US dollars, due to the latest bout of inflammatory rhetoric from Russia and China, aimed at America. USDCAD gains are limited by hopes for another surge in oil and other commodity prices in addition to significant long term resistance.
The USDCAD technical picture suggests more 1.3400-1.3800 range trading in March.
Oil Price
West Texas Intermediate (WTI) prices traded erratically in a $72.00-$82.00/barrel in February. Opec announced it would raise production by 1 million barrels/day beginning June 1, in the belief the increased supply would be more than offset as western sanctions on Russian energy exports take hold and China’s economic recovery kicks off. That view was supported after China reported sharply higher Manufacturing and Services PMI data for February. A break above $82.00/barrel targets $90.00/b.
Forecast Table
Bank 2023-USD/CAD Q1 2023-USD/CAD Q2
Scotiabank* 1.35 1.35
BMO 1.34 1.32
CIBC 1.34 1.32
TD Bank* 1.35 1.34
National Bank 1.35 1.32
*Forecast is based on last month. Forecast Table is for mid-market rates, and subject to change anytime.
