Richter survey of bank forecasts: Foreign exchange and interest rates

February 2018

Loonie edges higher; oil prices rise

At the World Economic Forum in Davos, Bank of Canada (“BoC”) Governor Stephen Poloz reiterated that NAFTA uncertainty remain a key concern for the bank. Further, Poloz stated that “it’s likely that money is going to remain easy for some time yet, because economies are still working their way through a lot of underlying stresses.” Despite the dovish rhetoric, the Loonie managed to secure modest gains against a weaker Greenback.

National noted that the Greenback saw its biggest monthly slump in almost two years. However, the reporting bank expects the USD to rebound later in the year as solid U.S. economic fundamentals possibly pave way to two more Fed interest rate hikes. National is not optimistic about the Loonie’s longer term prospects, highlighting the continued dependence on foreign capital in Canada, which is short-term in nature. TD argues that the Greenback was overvalued, for most of 2017 by comparing USD pricing versus major currencies. In Canada, TD highlights disproportional risks related to elevated household debt and NAFTA uncertainties, but concludes that the currency pair is trading at its fair value. CIBC adds that the CAD is counting on too much support from BoC hikes. Overall, surveyed banks lack consensus as to the future of the pair, forecasting between 76.34 and 83.13 US¢/CAD by end of 2018.

ECB to continue accommodative policy

At its January 25th meeting, the European Central Bank (“ECB”) kept its policy rate unchanged stating that the Governing Council “expects the key ECB interest rates to remain at their present levels for an extended period of time, and well past the horizon of the net asset purchases.” In a press conference following the ECB’s announcement, President Draghi noted that “the recent volatility in the exchange rate represents a source of uncertainty which requires monitoring with regard to its possible implications for the medium-term outlook for price stability.”  For the time being, any EUR strength appears to be held back with the ECB’s reluctance to let go of stimulus.

National warns that the EUR could see enhanced volatility ahead, highlighting geopolitical uncertainties such as Italy’s general elections on March 4th. Such elections add to Anti-EU populist movements, which are largely doing well in the polls and could potentially gain power by capitalizing on a soft Italian economy and a marginalized youth population. CIBC noted that there is still room for further appreciation later in the year highlighting fundamentals in the Eurozone continue to improve, with strong growth, PMI readings moving higher and unemployment continuing to fall. As such, CIBC is very optimistic as to the future value of the EUR, forecasting the pair to trade at 59.52 EUR¢/CAD by the end of 2018. Overall, the surveyed banks remain divergent as to the future of the currency pair, forecasting it to trade anywhere between 59.52 and 69.46 EUR¢/CAD through the end of 2018.

Fed holds, clears way for March rate hike

The reporting banks are in consensus as to further rate hikes by the BoC but are divided on their timing and frequency. RBC and National are anticipating three more hikes, while TD and CIBC are expecting only one more hike. Desjardins and BMO are calling for two more hikes, with BMO citing concerns over NAFTA and housing market’s response to new mortgage lending rules. In the United States, as widely anticipated, the FOMC left policy rates unchanged on January 31st but is anticipated to hike on March 21st. The surveyed banks are in consensus that the Fed will deliver three rate hikes this year, with RBC calling for a fourth hike.

2-year government yields upwardly adjusted in the U.S.; relatively unchanged in Canada

Since last months’ publication, the Canadian yield forecasts remained relatively unchanged with some minor upward adjustments. In the US, as economic fundamentals remain strong and incoming indicators continue to support at least three FOMC rate hikes in 2018, noticeable upward adjustments were made to the US yield forecasts by BMO, CIBC, National and Desjardins. TD and National highlight that higher inflation expectations have lifted US yields, with National adding solid momentum and easing of financial conditions as additional factors for the rise. Overall, the reporting banks are anticipating a steady rise in the 2 year government bond yield over the forecast horizon, expecting it to range between 2.05% to 2.45% in Canada, and 2.47% to 2.75% in the US by the end of 2018.

Yields to continue trending higher through 2018

The 10-year government bond yield forecasts were upwardly adjusted in Canada and the U.S. by a majority of the surveyed banks. In both Canada and the US, BMO expects bond yields to continue their upward trend, citing the prospects of more policy rate hikes and rising inflation risks. Notably, BMO also commented on an important recession indicator, stating that it does not anticipate that the 2 and 10 year yields will invert. Overall, the banks are in consensus as to the upward trend of the 10 year government bond yields, expecting them to yield between 2.35% and 2.95% in Canada and 2.90% to 3.30% in the US by the end of 2018.

Long bond yields rising in Canada and the U.S.

Compared to last months’ forecast, the long bond yields saw minor upward and downward revisions in the Canadian forecasts, while the US forecasts were more noticeably revised upwards. The surveyed banks are in consensus that long bond yields will steadily rise through 2019. RBC is on the high end in both Canada and the US, forecasting the yields to reach 3.15% and 3.60% by end of 2018, respectively.






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