Richter survey of bank forecasts: Foreign exchange and interest rates

April 2016

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Loonie rally persists; aided by crude rally and dovish Fed

On April 12th, the Loonie traded above 78.0 US¢/CAD extending its gains against the Greenback. This represents a 13% appreciation since January 18th when the currency pair bottomed at below 69.0 US¢/CAD. This appreciation was largely aided by the recent rally in crude oil prices, as crude oil traded above USD 40 for the first time in over three weeks. Additionally, according to National Bank, the appreciation of the Loonie was further fuelled by a dovish Fed which acknowledged a much less aggressive path of planned interest rate hikes in 2016 that ultimately suppressed the USD.

The bank forecasts indicate that the current valuations will not be sustained in the short-term, as a consensus exists that the currency pair will trade around or below 75 US¢/CAD over the next quarter. Looking ahead, the banks, with the exception of CIBC, anticipate the CAD to steadily appreciate versus the USD through 2017. CIBC states that the market is underpricing of Fed rate hikes, and cites this for their pessimistic outlook for the Loonie in 2017.

CAD/EUR forecasts remain divided, Brexit possibility adding to uncertainty

After a period of directionless volatility, the CAD/EUR traded in a relatively tight range over the month of March, and leading into the first few weeks of April. One of the central issues currently facing the Euro is the possibility of Britain exiting the European Union (colloquially referred to as “Brexit”). The ECB’s accommodative policy stance, soft growth and Brexit linked effects will limit the relative strength of the Euro. Therefore, given the multiple unknowns, the reporting banks remain divided as to the value of the currency pair through 2017. CIBC is on the low end, while RBC remains the most optimistic on the relative strength of the CAD relative to the Euro through 2017, with the forecasts ranging quite significantly from 64.7 to 76.9 EUR¢/CAD.

BoC rates unchanged, Fed rates continue to rise

No imminent changes expected in Canada as the overnight rate is expected to hold steady until at least Q1 of 2017. Thereafter, RBC, BMO and Desjardins anticipate the first rate hikes to occur in Q2, Q3 and Q4 respectively. Desjardins reported that the latest news would indicate that no further lowering of the Canadian key interest rate is needed; in part attributing the Government’s large planned public spending campaign as a driver of economic growth over 2017. In the U.S., the Federal Open Market Committee (“FOMC”) spoke of downside risks brought forward by global economic and financial developments, and now expect to hike rates just twice this year, down from the initial guidance of four, according to National Bank’s April publication. Consequently, many reporting banks revised down their Federal Funds Rate forecasts. In particular, RBC changed its 2017 year-end forecast to 1.75% from 2.75% last month to reflect the new economic realities and guidance.

2-year bond yields to increase, but to lesser extent versus March forecast

The 2-year government bond yields are anticipated to rise through 2017 in both Canada and the U.S., as the reporting banks’ forecasting consensus reveals. RBC had the most significant revisions, cutting its 2-year Canadian and U.S. government bond yield forecasts from 2.45% and 2.95% as reported in the March publication, to 1.85% and 1.95% as currently presented. The downward revisions do not change the consensus of gradually rising rates in either Canada or the U.S., but they do narrow the range of anticipated yields.

10-year government bond yields to rise, but at slower pace

The range of 10-year government bond yield forecasts also tightened for both Canada and the U.S. relative to the March publication. BMO remains on the low end of Canadian forecast with an expectation that the 10-year Canadian government yield will not exceed 2.0% through 2016. According to the National Bank’s publication, the forward curve has implied these rates at 2.02%, so it is worth noting that most banks anticipate a greater rate increase than what is being priced in the markets.

Canadian long bond yield dips back below 2.0%, U.S. yields also slide

Dating back to the December survey, March 2016 long bond yield forecasts ranged from 2.3% to 2.65% in Canada and 3.15% to 3.2% in the U.S. Currently, these yields sit at 1.95% and 2.55% respectively, falling well below the range forecasted approximately four months prior. RBC reaffirmed its optimism in the U.S. recovery by maintaining a 2017 year-end forecast of 3.75%, with the remaining reporting banks well below this figure.

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