Economic Outlook and Summary
October markets were erratic, and fittingly, that’s how they finished the month. The US dollar index (DXY) consolidated the gains from August and September in a choppy 105.11-107.05 range. The S&P 500 was down 5.0% at one point but managed to claw back many of those losses, yet still finished down 2.21%. The catalyst for the uncertainty was the outlook for US interest rates, as measured by US 10-year Treasury yields, which spent a turbulent month in a 4.53-5.02% range, closing at 4.925%.
The terrorist attack on innocent Israeli women and babies occurred on October 7, but after a few days of negative risk sentiment, traders returned their focus to economic releases and upcoming central bank meetings.
Robust US and Canadian employment reports set the stage for a sharp, broad-based US dollar retreat in the first week of the month, which was reinforced the next week when the minutes from the September FOMC meeting revealed a dovish bias. The 63,000 Canadian job gain gave the Canadian dollar a short-lived boost.
Meanwhile, in Europe, the ECB fooled no one when they left rates unchanged, and despite policymakers claiming it was far too early to be discussing easing, traders priced the first rate cut for July 2024. The Bank of England followed suit and left its benchmark rate unchanged at 5.25% on November 2.
November markets are likely to be as turbulent as they were in October, with the focus squarely on the December 13 FOMC meeting.
The USD and Federal Reserve
The highly anticipated Federal Open Market Committee (FOMC) meeting on November 1 didn’t disappoint. The Fed left rates unchanged at 5.5%, but they tweaked the monetary policy statement, mentioning both tighter financial and credit conditions, which set the cat among the pigeons.
Traders and economists immediately concluded that the level of Treasury yields meant the Fed no longer needed to raise its policy rate. The US dollar and equities plunged, but the losses were quickly recouped. Bond traders quickly decided that if the Fed wasn’t hiking, its next move would be to cut, and they drove the US 10-year Treasury from 4.925% before the FOMC meeting to 4.47% on November 8.
Traders can look forward to a healthy heap of US data, including consumer sentiment, inflation, and retail sales, ahead of a hearty Thanksgiving dinner and an extended holiday from November 20-24
The Canadian Dollar and Bank of Canada
October wasn’t a good month for the Canadian dollar. It was under pressure almost from the opening bell and traded with a negative bias until the last day of the month. The Bank of Canada left interest rates unchanged on October 25 and attempted to leave markets with the belief that rates could still go higher. Traders weren’t buying it, and after the Labour Force survey showed Canada added fewer jobs than expected (17,500 vs. forecast 22,500), they started pricing in a BoC rate cut as early as April 2024.
It’s way too early for rates to move lower, which was evident in the November 8 release of the Summary of Deliberations. Policymakers are split on whether to raise rates or leave them unchanged. No one was talking about rate cuts.
The Canadian dollar traded in a USDCAD range of 1.3560-1.3905 in October, and it looks like it will trade in a 1.3600-1.3900 band in November.
West Texas Intermediate (WTI) oil prices surged to $95.00/barrel in the wake of the Hamas terrorist attack. Traders feared that Israel’s retaliation would lead to an escalation that could encompass the entire region. It hasn’t happened yet, and WTI retreated from its $83.50/b on November 1 to $75.00 on November 9. Traders are unwinding long crude positions in the belief that slow Chinese economic growth and high interest rates are curbing demand despite OPEC production cuts. OPEC claims demand is still outstripping supply and believes the selling is due to speculators. WTI support is at $73.00/b, while resistance is at $80.00/b
Bank 2023 – USD/CAD Q4 2024-USD/CAD Q1
Scotiabank* 1.3500 1.3300
BMO 1.3500 1.3400
CIBC 1.3900 1.4200
TD Bank* 1.3700 1.3800
National Bank 1.3800 1.4200
*Forecast is based on last month. Forecast Table is for mid-market rates, and subject to change anytime.