The Fed raised rates at the end of July and claimed that future monetary policy decisions would be data-dependent. The key US economic indicators released in August reflected a robust domestic economy that was demonstrating resilience in the face of Fed rate hikes. The labor market showed signs of cooling but remained very healthy, while various inflation measures showed that the pace of declines had slowed sharply and remained well above the Fed’s 2.0% target.
The strength of the US economy contrasted with that of China, Europe, and the UK. Economists continue to downgrade Chinese GDP growth estimates due to the re-emergence of property developer concerns, falling PMI readings, and youth unemployment so high that Beijing has stopped releasing unemployment data.
The US dollar saw renewed demand after the US 10-year Treasury yield rallied from 3.98% to 4.34% in August. It remains elevated in the first week of September, with some forecasters predicting further gains to 4.5% this year.
The USD and Federal Reserve
The US dollar rally that began in the middle of July continued unabated in August and in the first few days of September. It looks like it will continue in September, as traders and analysts become convinced that US rates may go higher and remain at elevated levels far longer than earlier anticipated. The risk that inflation stays elevated is underpinning the US dollar, and although the labor market has cooled, the demand for workers still outstrips supply. The prospect of rate cuts in early 2024 has been pushed back toward the third or fourth quarter. Fed officials appear to be leaning toward the ‘higher rates for longer’ view, which will be reinforced with every economic indicator suggesting inflation declines may have found a short-term bottom.
The Canadian Dollar and Bank of Canada
The Canadian dollar lost 1.95% in August and has already lost 1.3% in the first week of September. The loonie is under pressure after the Bank of Canada left rates unchanged on September 6. The statement tried to be balanced and suggested additional rate hikes were not out of the question. It said, ‘Governing Council remains concerned about the persistence of underlying inflationary pressures and is prepared to increase the policy interest rate further if needed.’ Perhaps, but the labor market is tightening, domestic and international economic growth is faltering, leading to many major bank economists suggesting Canadian interest rates have peaked. However, rising oil prices could derail that prediction.
West Texas Intermediate rallied 25.5% since July’s $69.60/b low in July to $87.40/b on September 7. The rally is being fueled by announcements from Saudi Arabia and Russia that previously announced oil production cuts (1.3 million barrels/day and 300,000 mb/d, respectively) would be extended until the end of 2023. The news overshadowed concerns that China’s economic growth problems would limit demand. The technical picture is bullish with a break above $83.80/b targeting $93.80/b.
Forecast Table USDCAD
Bank 2023-USD/CAD Q3 2023-USD/CAD Q4
Scotiabank* 1.30 1.30
BMO 1.3190 1.3050
CIBC 1.3300 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.