Richter survey of bank forecasts: Foreign exchange and interest rates

April 2017

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Bank of Canada boosts Loonie against USD

The CAD/USD closed at 75.0 US¢/CAD on April 13, 2017, rising to the highest level since the beginning of March. The rally happened after the Bank of Canada published its monetary policy statement, maintaining the overnight rate at 0.5 per cent, with Governor Poloz commenting that “a rate cut was not on the table at this time”. The Greenback on the other hand has shown some weakness starting 2017. According to National, the trade-weighted Greenback has depreciated more than 3.0% in Q1. National attributes the setback to the dovish comments surrounding the Fed rate hike in mid-March, and also the demonstrated difficulties facing the Trump administration to enact its election promises.

The reporting banks made minor changes towards the currency forecasts this month. Nevertheless, upward adjustments were made by Desjardins, signaling optimism towards the Canadian economy. Desjardins upgrades the Canadian GDP growth outlook from 1.9% to 2.2%, placing faith in the Canadian economy by noting “the outlook is good for 2017”. National also cited strong economic data, but warned about Toronto’s red-hot housing market, referencing that price gains cannot be fully explained by increases in employment and household formation. Overall, the main message of surveyed banks’ forecasts remains constant to that in our previous surveys: that the CAD faces near-term challenges but will gradually regain strength in 2018.



Confidence is up in Euro zone but CAD/EUR
forecasts remain divided amidst uncertainty

The CAD/EUR currency pair traded at
70.5 EUR¢/CAD on April 17th, well above its March low of 68.8 EUR¢/CAD. On a month-to-month basis, the reporting banks made little change in their outlooks for the currency pair. Uncertainty remains that the rise in populism from the United States and the United Kingdom may materialize in mainland Europe with the upcoming French and German elections. Nevertheless, the economic data in the Euro area has exhibited continued momentum. According to RBC’s comments, it is expected that with this momentum, EU policymakers may begin withdrawing stimulus as early as next year. 

The lack of consensus amongst surveyed banks remains the current key theme to the CAD/EUR forecasts. Notably, BMO believes the currency pair will trade around 72.3 EUR¢/CAD by the end of 2018, cautiously citing that it is not changing its current forecasts until the economy recovers further and inflation becomes self-sustaining. On the other side, CIBC has more faith in the Euro; believing that the CAD/EUR currency pair is projected to trade at 62.7 EUR¢/CAD by the end of 2018. According to CIBC, the bank expects the French election results to be “market friendly”. In general, the main theme is that the direction of the Euro is still surrounded by political and economic uncertainties, which continues to be reflected in the surveyed banks’ forecasts. 



Overnight lending rates: Stronger economic data indicates earlier possibility of Bank of Canada rate hikes

This month, we observed that CIBC, BMO and Desjardins revised their rate-hike expectations to earlier dates. As indicated by BMO, the recent stronger tone in Canada’s labour market and GDP data is the major reason for such adjustments. Besides the Canadian economy’s upswing, fiscal policy was also referenced in several banks’ commentary articles. Desjardins comments that the federal government’s stimulus plan will start to have impact, and the tax measures introduced in the 2016 Budget are also enhancing Canadian household disposable income. As for U.S. Fed-rate forecasts, BMO called for earlier rate hikes relative to last month’s publication, largely due to its positive interpretation of the mid-March FOMC meeting minutes. National also anticipates a swifter monetary normalization path, calling for the next Fed rate hike expectation to happen in September 2017.



2 year government bond yields: Rising yields anticipated in both Canada and the U.S.

This month we observed that upward adjustments were largely made to the Canadian 2 year government bond yield forecasts. Notably, both BMO and CIBC adjusted their bond yield forecasts to reflect an anticipation of higher yields over last month’s publication. For U.S. 2 year government bond yields, National made downward adjustments to the forecasts in the next three quarters. Their comments focus on the debacle to repeal Obamacare by the Trump administration, which could harm the market’s confidence in the outlook of the U.S. economy. Overall, 2 year government bond yields are expected to rise in the next two years for both Canada and the U.S.



10 year government bond yields: 10 year U.S. bond yields downwardly adjusted

On April 17, the U.S. 10 Year Treasury yielded 2.24%, lower than levels observed in March as the Trump administration failed to bolster confidence in the U.S. economic recovery by failing to deliver on key reform objectives. Consequently, downward adjustments for the U.S. 10 Year Treasury were made by BMO and National. Again, National noted that the failure of Republicans to deliver health care legislation to replace Obamacare casts doubts on the ability of President Trump. Tax reform therefore might be a more challenging goal than expected.

As for the Canadian 10 year bond yields, the forecasts were upwardly adjusted by reporting banks, with an expectation that they trade anywhere between 2.2 and 3.1 per cent by the end of 2018. 



30 year government bond yields: Long bond yields to rise gradually

The Banks made minor upward adjustments to Canadian long bond yield forecasts. However, National left a cautious note by citing the Bank of Canada’s cautious outlook from their March 28th press conference. 

The U.S. long bond yields fell slightly over the month of March but their forecasts were left relatively intact by the surveyed banks. 








 

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