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USD / CAD - August 2023: FX Outlook - Economic Outlook and Summary

There was a lot going on in July, including US and Canadian holidays at the beginning of the month, and more importantly, the Bank of Canada (BoC), Fed, and European Central Bank (ECB) monetary policy meetings. They all raised rates by 25 bps and claimed that future rate decisions would be data-dependent.

The US dollar index retreated in the first half of the month, then rallied steadily into month-end as a series of strong US economic reports and rising stock markets suggested the Fed would adopt a hawkish bias.

August opened with the world in risk aversion mode due to Fitch Ratings downgrading US debt to AA+ from AAA. Traders will be focusing on US inflation readings and the Jackson Hole Symposium on August 25.

The USD and Federal Reserve

The US dollar traded in a similar fashion to how it moved in June, retreating in the first part and then surging into month-end. The Fed's decision to raise rates and be data-dependent led to some choppy price action around key economic releases, especially the inflation measures. The Fed said that the labor market remained tight but saw signs that the tightness was beginning to ease. Mr. Powell emphasized that the process of getting inflation back to 2.0% has a long way to go.

The Canadian Dollar and Bank of Canada

The Canadian dollar rallied early and then retreated in the last half of the month. The Canadian dollar peaked after the BoC hiked rates, but once the focus shifted to the Fed, the currency was at the mercy of broad US dollar sentiment.

BoC Governor Tiff Macklem said policymakers were trying to balance the risks of under and over-tightening. He said if they don't do enough now, it means that they will have to do more later. He is concerned about the slow progress in getting inflation lower, noting that much of the downward momentum came from lower oil prices.

USDCAD traded wildly in a 1.3090-1.3390 range between July 3 and July 14, then traded sideways in a 1.3120-1.3260 range until month-end. US dollar sentiment was the driving force for the last half of the month, and it will be for all of August. The major USDCAD support is 1.3230, and resistance is at 1.3390.

Oil Price

West Texas Intermediate steadily rose higher in July, rising from $69.60/b to $81.80/b by the end of the month. The trend is expected to continue, albeit at a slower pace in August, with a break of $83.50/b targeting $87.50/b, then $90.30/b. WTI oil prices were supported when the Energy Information Administration reported a 17.04 million barrel drawdown of crude stocks for the week ending July 28. In addition, Saudi Arabia said it would extend its production cut of 1.0 million barrels per day for September. Russia chimed in with a 300,000 b/day cut for September as well.

Forecast Table USDCAD

Bank 2023-USD/CAD Q3 2023-USD/CAD Q4

Scotiabank* 1.30 1.30

BMO 1.3190 1.3050

CIBC 1.3250 1.31

TD Bank* 1.33 1.35

National Bank 1.36 1.38

*Forecast is based on last month. Forecast Table is for mid-market rates, and subject to change anytime.