Economic Outlook and Summary
January was a very choppy month. Equity traders embraced the notion of sharply lower US interest rates in 2024 and drove the S&P 500 index to a record high. The idea of 150 bps in easing before the end of the year had equity bulls salivating. They weren’t deterred by a series of relatively robust US economic reports that indicated the highly anticipated economic slowdown had failed to materialize. Consumer Price Index (CPI) and Personal Consumption Expenditures (PCE) data showed inflation was not cooling as anticipated.
The European Central Bank (ECB) failed to encourage the market that expected interest rates would be reduced in the near term. Instead, the statement said, “Based on its current assessment, the Governing Council considers that the key ECB interest rates are at levels that, maintained for a sufficiently long duration, will make a substantial contribution to this goal.”
Global risk sentiment flitted between risk on and risk off following the UK and US retaliation against Houthis for attacking Red Sea shipping by bombing targets in Yemen, but ultimately, markets remained risk positive.
The month ended with the Federal Open Market Committee issuing a somewhat hawkish monetary policy statement
The USD and Federal Reserve
January ended with Fed Chair Jerome Powell slamming the brakes on early Fed rate cut speculation after a series of Fed officials suggested as much in speeches throughout the month. The January 31 monetary policy statement was definitely dovish as it dropped the reference to having a “tightening bias.” But that was the extent of the dovishness. Mr. Powell refused to give any hint of when the first rate cut would occur by saying decisions would be data-dependent. And two days later, the January nonfarm payrolls report was far stronger than even the most optimistic forecast, effectively torpedoing rate cut hopes for March.
The US dollar edged higher throughout January, with the US dollar index (DXY) rising from 101.75 at the start of the month to 103.55 at month’s end. Those gains were because traders expected the other major G-10 central banks to cut rates aggressively as well. The DXY accelerated higher in the wake of the nonfarm payrolls report.
The Canadian Dollar and Bank of Canada
The Canadian dollar retreated steadily throughout January, with its direction determined by the outlook for US interest rates and by Wall Street gains. USDCAD climbed from a low of 1.3239 on January 2 to 1.3540 by the last week of the month. The Bank of Canada delivered somewhat cautious forward guidance by cutting the line about hiking rates, which said the Governing Council “remains prepared to raise the policy rate further if needed.”
Canada avoided a recession (so far). November GDP rose 0.2%, and Statistics Canada is predicting 0.3% GDP growth in December. It’s better than negative but pales in comparison to the US economy, which grew at 3.3% in Q4.
The Canadian dollar continues to be overshadowed by US economic data and Fed rate speculation, with Canadian data and BoC views not having a lasting impact on trading.
West Texas Intermediate (WTI) oil prices churned in the first half of the month and then rallied from $70.85 on January 17 to $78.74/b on January 28. The aggressive response to Houthi rebel attacks on Red Sea shipping by the US and UK raised fears that the conflict would expand to Iran and disrupt oil supplies. The surge in the US dollar and reports that US oil exports were picking up some of the slack from OPEC production cuts drove prices down to $72.84 in the first week of February.
Bank 2024-USD/CAD Q1 2024-USD/CAD Q2
Scotiabank* 1.3300 1.3300
BMO 1.3500 1.3400
CIBC 1.3900 1.4200
TD Bank* 1.3800 1.3900
National Bank 1.4200 1.4500
*Forecast is based on last month. Forecast Table is for mid-market rates, and subject to change anytime.