USD / CAD – January 2023: FX Economic Outlook

Learn how Tradingtwist can help you save up to 2% on US dollar purchases or sales when compared to rates offered by your Canadian bank’s Economic outlook.

Despite the fact that 2023 is a brand-new year, the market will be grappling with the same issues in the early going. With every inflation data point, the argument over when and where the US interest rate will peak will continue, which will influence the path of the equity market. Regarding the risks of a US recession, analysts are split. While analysts at RBC and Blackrock think a recession is predicted, those at JP Morgan say one won’t happen.

The year 2022 was a terrible one for the world stock markets. Due to the Fed raising interest rates by 400 basis points in an effort to rein in rising inflation, the S&P 500 index, the preferred risk mood barometer for traders, lost close to 20% of its value. The US 10-year Treasury yield increased as a result of those increases from 1.5% on January 5, 2022, to 4.34% by November 30, when Fed rate peak talk reduced yields to 3.88% by December 30, 2022.

Major geopolitical challenges including the conflict between Russia and Ukraine, China’s desire for Taiwan, and Iran’s pursuit of nuclear weapons will all have a negative impact on global economic outlook development in 2023, support oil prices, and maintain risk sentiment high.

Dollars and the Federal Reserve

The rapid Fed rate increases in 2022 helped the US dollar increase by 8.37% against the US dollar index. The Japanese yen had the worst performance of the major G-10 currencies, losing 13.9%, a significant improvement from its highest loss of 31.9% on October 21.

As was largely predicted, the Federal Reserve increased US interest rates by 0.50% on December 14. In 2022, rates increased for the sixth time in a row, which was the most drastic tightening since the 1970s. The Fed’s commitment to maintaining price stability was reaffirmed by Fed Chair Jerome Powell, who also noted that “more work remains.” The Dot-plot forecasts showed that the peak rate is between 5.0 and 5.25%, as suggested by policymakers.

The Fed is not in a rush to decrease rates, so if the dot-plot predictions come true, there won’t be any rate reductions in 2023. Mr. Powell concurs, stating that “historical experience strongly warns against premature policy easing. We won’t start thinking about rate decreases until the committee is certain that inflation is consistently falling below 2%. In the short run, this viewpoint will lessen losses in US dollars.

January’s market activity will be heavily influenced by inflation indicators including CPI, PCE, and the nonfarm payrolls report’s average hourly earnings component.

The Canadian Dollar and Bank of Canada

Although turbulent, the Canadian dollar remained rangebound in December. It lost 7.2% of its value versus the US dollar at the year’s end. The local currency (AUD, NZD, and CAD) suffered the most from the commodities currency bloc’s weakness, in part because the currencies of Australia and New Zealand benefited from China’s ambitions to reopen its economy while the Canadian dollar suffered from concerns about the US recession.

The Bank of Canada raised its overnight rate by 50 basis points to 4.25% on December 7 and then gave a slightly dovish view, saying that future rate hikes would depend on evidence. The rate hike caused the BoC overnight rate to fall by 0.25% below the fed funds rate, which helped the USDCAD. If Canadian inflation stays high, that could change at the next BoC monetary policy meeting on January 25, when rates are anticipated to increase by 25 basis points.

While prices are below 1.3700, the risk is for more losses to 1.3200 as the USDCAD has been trending lower since mid-October.

Oil Price

Due to Opec’s price manipulation and Russia’s invasion of Ukraine, oil prices saw a turbulent, choppy 2022. Despite these changes, West Texas Intermediate oil prices only ended the year 4% higher than they had begun. According to Opec, the global oil demand would increase by 4.2 million barrels per day in 2022. It didn’t take place. The cartel predicted that demand would increase by 2.2 m/bd in 2022 and remain stable in 2023 December.

On January 1, 2023, Germany and Poland stopped importing any pipelined Russian oil. This action, along with additional EU energy sanctions against Russia that go into force on February 5 and an anticipated increase in Chinese demand for crude oil, might raise WTI prices.

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