Richter survey of bank forecasts: Foreign exchange and interest rates

August 2017

The flight of the Loonie

As at the date of publication, the Loonie is holding steady at 78.83 US¢/CAD. The CAD has made strong gains over the past month against the USD, gaining almost 7.5% since June 1st of this year.  Some of the factors contributing to the Loonie’s gain are the overnight rate hike last month, as well as a weaker Greenback. The USD is also facing growing uncertainty as political tensions continue to run higher in the U.S., and between the U.S. and North Korea - which is also contributing to an uneasy environment for global markets overall.

National highlights that the recent surge in the Loonie warrants caution, adding that while the CAD’s momentum could persist in the near term, ultimately the Greenback is poised for a comeback as markets price in future Fed rate hikes. CIBC, on the other hand, is less optimistic about the future of the USD, as it anticipates headwinds resulting from more competitive foreign yields and a widening current account deficit. The consensus amongst the surveyed banks has been one of an upward revision in the relative strength of the Loonie from last month’s forecasts, with Desjardins on the high-end calling for 81.0 US¢/CAD, while CIBC is on the low end at 76.34 US¢/CAD by the end of 2018.

ECB stands cautiously pat on monetary stimulus amid Euro’s rise

In a July 20th meeting, the governing council for the European Central Bank (“ECB”) upheld its prior position that it stands ready to increase its Quantitative Easing (“QE”) program, should it be necessary. The ECB stated that "If the outlook becomes less favorable, or if financial conditions become inconsistent with further progress towards a sustained adjustment in the path of inflation, the Governing Council stands ready to increase the program in terms of size and/or duration." ECB’s President, Mario Draghi, added that a more in-depth discussion will be held in the fall, so stay tuned for more following the September 7th policy meeting.

In a review of this month’s survey results, National highlights that the EUR struggled to capitalize on momentum, citing a lagging southern European economic activity, Brexit, and the upcoming elections in Italy that remain uncertain. CIBC highlights that the EUR has been undervalued based on trade fundamentals, and that the Euro should continue to gain ground through 2018. Overall, the surveyed banks anticipate the currency pair to trade anywhere between 63.61 and 70.30 EUR¢/CAD through 2018. 

Another hike is on the horizon

The Bank of Canada’s next interest rate announcement is scheduled for September 6th, followed by a second meeting on October 25th, which will include the publishing of the quarterly Monetary Policy Report. In anticipation of the announcements the surveyed banks are generally in consensus that the Bank of Canada will continue to tighten monetary policy. Given the upbeat tone of the policy announcement on July 12th, BMO highlights that the market is now contemplating a more expeditious policy path than as previously forecasted. In the United States, the consensus amongst the surveyed banks is that the Fed is to announce the start of tapering reinvestments and commence balance sheet normalization in September. 

2-year government bond yields anticipated to increase

The surveyed banks left their forecasts largely unchanged compared to last month, continuing to anticipate increases to the Canadian and U.S. 2 year bond yields through 2018.  Notably, RBC and BMO expect steep increases to the Canadian 2 year government bond yields by 2018 year-end, to 2.10% and 2.05% respectively. RBC also anticipates the sharpest increase to the U.S. 2 year government bond yields through 2018, expecting them to rise to 2.70% - nearly twice the current yield of 1.37%. 

10-year government bond forecasts unchanged, yields to rise

Since last month’s publication, 10-year government bond yield forecasts from the reporting banks were little changed in both the U.S. and Canada. CIBC cautions that with U.S. inflation coming in on the low side, U.S. yields could lose some of their edge, despite the comment CIBC made no adjustment to its forecast. Overall, consistent with last month’s forecasts, the reporting banks share a consensus that the yield on 10-year government bonds should rise steadily through 2017 and 2018, in both Canada and the United States.  

Long bond yields to rise through to 2018 end

As of August 11th 2017, the Canadian and U.S. long bonds yielded 2.29% and 2.82% respectively. From last month’s publication, the forecasts amongst surveyed banks remained relatively unchanged and consistent with the expectations of the yields to continue to rise over the remainder of 2017 and through 2018.  RBC remains on the high end of the forecasts of the surveyed banks, expecting Canadian and U.S. long bond yields to rise to 3.25% and 3.75% respectively by 2018 year-end.

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