Economic Outlook and Summary
The first half of February saw broad-based US dollar demand. A robust nonfarm payrolls report underscored the resilience of the US economy and justified the Fed’s decision to leave rates unchanged for the foreseeable future. Those results put the spotlight on upcoming inflation data, which was also hotter than expected.
The second half of February started slowly due to Lunar New Year holidays in Asia, and the DXY slowly reversing the post-inflation data rally. Fed officials constantly pushed back against expectations that rates would be cut in June, while still keeping three rate cuts on the table by year-end. A tamer than expected Core-PCE reading on the last day of the month merely served to muddy the interest rate outlook.
In March, traders will be scouring economic data for clues to the timing of the first Fed rate cut. However, most Fed officials are suggesting any move will not occur until the second half of 2024. Price action will be skittish until the FOMC meeting and updated economic projections on March 20th.
The European Central Bank left its benchmark rates unchanged and released new inflation forecasts. They are sharply lower than in December, and some analysts are expecting a June rate cut.
The USD and Federal Reserve
On March 6, Fed Chair Jerome Powell set the tone for traders, at least until the FOMC meeting on March 20. Mr. Powell told the House Finance Committee that the benchmark rate was “likely at its peak for this tightening cycle.” He added that it would “likely be appropriate to begin dialing back policy restraint at some point this year.” The market reacted to the latter statement, and the US dollar index (DXY) reversed its mid-February rally and dropped from 104.87 to 102.82 on March 7. Minneapolis Fed President Neel Kashkari said the recent data suggests only two rate cuts would be appropriate. If traders start to adopt that view, the US dollar downside may be limited.
The Canadian Dollar and Bank of Canada
The Canadian dollar is trading at the whim of US dollar sentiment and at the moment, the sentiment is bearish. The Bank of Canada left its monetary policy unchanged on March 6 as expected, and Governor Macklem warned of upside risks to inflation, also as expected. The Canadian dollar ignored the news as events south of the border were key.
USDCAD turned bearish on March 6 following Mr. Powell’s testimony and broke below significant support at 1.3550 and again at 1.3480. The former level will revert to significant resistance. A decisive move below 1.3440 sets the stage for further losses to 1.3360. The losses are supported by narrowing CAD/US interest rate differentials.
Oil Price
West Texas Intermediate (WTI) oil prices rallied in February, but the gains stalled just above $80.00/b, but prices remain within spitting distance of that price as of March 7. OPEC and friends
extended the voluntary production cuts through to the end of June, which has helped put a floor under prices. However, China’s economy is still struggling, and the US is producing crude at record levels, which is limiting gains.
Bank 2024-USD/CAD Q1 2024-USD/CAD Q2
Scotiabank* 1.3300 1.3300
BMO 1.3400 1.3300
CIBC 1.3800 1.3700
TD Bank* 1.3600 1.3800
National Bank 1.3800 1.4100
*Forecast is based on last month. Forecast Table is for mid-market rates, and subject to change anytime.