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Loonie resilient against Greenback amidst expectations of policy divergence
The Loonie’s momentum continued into 2017, steadily appreciating against the Greenback to 76.5 US¢/CAD from post U.S. election lows. National has commented that Canada’s stable political environment, AAA-rated government bonds and encouraging economic data could be the factors that shore up a resilient Loonie.
In our survey of the banks’ forecasts, TD gives the most optimistic prediction of the CAD, whilst Desjardin sees a stronger USD. According to TD, declining inflation reflects a Canadian economy that is attempting to find its footing as it continues to adjust to the lower commodity prices and towards a service-oriented economy. On the current economic path, Canada has sufficient momentum to keep the CAD in the mid-70 cent range. In contrast, Desjardins expects the U.S. economy to strengthen in 2017, keeping the CAD muted. Desjardins adds that diverging monetary policy between Canada and the U.S. will also keep the CAD muted. Overall, the surveyed banks have consensus that the CAD will trade in a relatively narrow range of between 72.0 and 77.0 US¢/CAD through to the end of 2018.
Promising economic data and political uncertainties keep CAD/EUR forecasts divided
As political uncertainties rise in-line with the populist politics in Europe and on-going Brexit negotiations, the CAD/EUR forecasts remain divided, with a current valuation of 71.7 EUR¢/CAD as at the publication date. The Eurozone economy has shown promise as recent figures show GDP and export growth, the highest consumer confidence levels in almost two years, and the Euro area composite PMI hitting a post-recession high in December of last year. Turning to our survey of Canadian banks, we note that RBC cites that the latest Eurozone inflation data surprised to the upside, with the fastest inflation rate increase in nearly four years. Despite the positive economic news, the European Central Bank has cautiously kept its policy stance unchanged as of its latest meeting on January 19th, noting that the asset purchase program will continue until the Governing Council sees sustained strength.
Canadian forecasts remain intact; rising rates expected in the U.S.
As National reports, Governor Stephen Poloz made it clear that the Bank of Canada was unhappy with market developments after the U.S. presidential election. Poloz said he is prepared to cut interest rates if new U.S. protectionist measures derail the Canadian economy. Despite the rhetoric, the surveyed banks have left their overnight rate forecasts intact over last month. In terms of the forecasts for the Federal fund rate, both TD and CIBC made upward adjustments. TD believes that the Fed is not ‘behind the curve’ for inflation and the committee is committed to a gradual, non-disruptive, rate hiking cycle. We continue to see our clients seek advantages from low Canadian interest rates.
2 year bond yields expected to rise
In comparison to last month’s publication, both upward and downward adjustments were made over the forecast horizon. TD, who made some upward adjustments to anticipate higher yields, believes that inflation expectations may indeed drift even higher once U.S. fiscal expansion policy plans are more concrete, whereas they currently largely remain uncertain. On the other end, National revised downwards their forecasts for 2 year government bond yields in the U.S., mindful of the uncertainties of Trump’s policies and Twitter communications. Overall the banks are in consensus in anticipating 2 year government bond yields to rise in both Canada and the U.S.
U.S. fiscal stimulus cautiously promising
TD also made upward adjustments to Canadian and U.S. 10 year government bond yield forecasts. Notably, greater adjustments were made for the latter half of 2018, where perhaps TD is seeing a more optimistic economic outlook. Interestingly, BMO holds back their 10 year bond yield forecasts for both Canada and U.S. – emphasizing that investors are cautious as President Trump’s “America First” theme and other protectionist remarks threaten global trade and U.S.-global relations. Overall the consensus still remains that yields should rise in both Canada and the U.S. from current historically low levels.
Long bond yields retreat as markets await clarity on fiscal policies
After sharply rising following the U.S. election, long bond yields have retreated. Notably, both Desjardins and BMO downwardly adjusted their Canadian and U.S. long bond yield forecasts. Desjardins comments that the surge in optimism that followed the U.S. election has now given way to hesitation as investors await more concrete developments. Overall, the surveyed banks continue to anticipate that long bond yields should rise through 2018 from current levels.
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