The month of April continued to bring volatility to the Canadian dollar. If we look back over this year, the things that come to mind are uncertainty and risk management. In the first quarter of 2015, we saw the Big 5 Canadian banks adjust their forecasted USD/CAD exchange rates on average by 10%, we saw oil break into lows that we have not seen since 2008/2009, only to gain back more than 35%. April was no exception with the Canadian dollar appreciating over 6% from where it started at the month open.
Let’s face it, if the highest paid economists at the major Canadian banks cannot predict the exchange rates a couple months down the road within a 10% window, do we really want our profits riding on this roller coaster.
It may be time to, lock in your exchange rates and get certainty back into your company cash flows. We’ll cover what has happened in the markets, the current exchange rate predictions from the top analysts in the country, and how you can reduce your foreign exchange risk.
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What is Driving the Canadian Dollar?
The key drivers of the Canadian dollar as we close out April have been oil prices, interest rates and policy outlooks from both the Federal Reserve and the Bank of Canada.
It was only June 2014 when oil was above $100/barrel and the Canadian dollar was in the 1.06’s. Since then we have seen oil drop as low as $42/barrel with the Canadian dollar following suit pushing toward the 1.30 mark which we have not seen since 2008/2009, the last time oil experienced similar wild fluctuations. In April we saw oil gain over 35% from its low pushing back toward the $60 mark, helping the Canadian dollar push back toward the 1.20’s.
In April, the dovish sentiment and surprise rate cut by the Bank of Canada in January was replaced by a more hawkish tone at the mid-April meeting.
The economy in the U.S. barely grew in the first quarter, after oil prices plunged and the dollar surged. Gross domestic product, the volume of all goods and services produced, rose at a 0.2 percent annualized rate after advancing 2.2 percent the prior quarter.
The April 29th Federal Reserve interest rate decision was unanimous. It repeated that it will raise rates when it sees further labor-market improvement. Although they said that they are “reasonably confident” inflation will move back to its 2 percent goal over time, inflation has lingered below the Fed’s goal for 34 straight months.
Lower oil prices have helped keep a lid on inflation while also hurting energy-related investment. On top of this, the stronger U.S. dollar has curbed exports and made imports cheaper. The sharp slowdown reinforced expectations that the Federal Reserve will keep interest rates near zero at their next meeting in June or longer. Fed officials have said they expect to raise rates this year for the first time since 2006 as the economy nears full employment, and that their decision will be guided by the latest data.