Richter survey of bank forecasts: Foreign exchange* and interest rates

June 2016

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*Richter would like to acknowledge the drafting for this document occurred prior to the Brexit vote. For reporting dates from the select financial institutions, the dates are noted below.

Loonie rally cools off, upside limited due to diverging monetary policies

The Loonie traded at 77.8 US¢/CAD on June 14th, unchanged since last month’s report, but nevertheless up nearly 15% from its January low. Despite facing some economic headwinds, the CAD rally has been supported by crude oil prices which have nearly doubled this year. The trend may be difficult to sustain as anticipated monetary policy divergence between the Fed and the Bank of Canada, which are separately reported in the overnight rate forecasts within this bulletin, could cap further appreciation of the CAD relative to the USD from current levels.

According to TD, monetary policy divergence will once again become a factor for the Loonie, likely capping any upside, even as oil prices move gradually higher. TD forecasts a difference in policy targets of 75 to 100 bps between the two countries which will temper any further appreciation of the CAD versus the USD. Overall, the surveyed banks do expect the currency pair to trade somewhere around the current valuation by 2017 year end, between 75.0 and 81.0 US¢/CAD.

CAD/EUR forecasts lack consensus ahead of Brexit decision

On June 23rd, the UK will hold a referendum to decide whether or not it shall withdraw from the European Union, an event dubbed as "Brexit". Recent opinion polls have demonstrated that the outcome will be difficult to gauge, and as such is likely contributing uncertainty to the observed CAD/EUR forecasts which have failed to show much consensus in the recent months. Even if Brexit is avoided, several questions remain in the Eurozone; including the extent of the European Central Bank’s monetary stimulus program and the resurfacing Greek debt crisis.

According to National, the European Central Bank is adopting a ‘wait and see’ approach with respect to its monetary easing program which is showing improvement, but also further comments that structural problems such as poor demographics and the fiscal stubbornness of the governments in the Eurozone should keep the EUR grounded. Observing this month’s expectations, the surveyed banks show a wide range of forecasts, expecting the currency pair to trade anywhere between 76.9 and 62.5 EUR¢/CAD through 2017.


Bank of Canada steady with Fed to continue liftoff

On June 15th, the FOMC announced that they are maintaining accommodative monetary policy to further support improvement in labor market conditions and a return to target inflation. Going forward the FOMC expects economic conditions to evolve in a manner that warrants gradual increases in the federal funds rate. In Canada, on May 25th, the Bank of Canada, held the overnight rate steady at 0.5%, in line with last month’s forecasts as presented by the reporting banks. BMO notes that the Bank of Canada will sit on the sidelines despite a strong first quarter, whereas Fed hikes are likely in July and December after a round of stronger economic data and less dovish minutes from the April FOMC meeting. Overall, the forecasts remain relatively unchanged with the Canadian overnight rate expected to remain steady until at least Q2 of 2017, and with the Fed forecasted to raise rates through 2017.

Two year rates range bound; anticipated to increase

Despite the surveyed banks anticipating increases to the Canadian and U.S. 2 year bond yields in the past few publications, the yields have remained relatively unchanged and range bound for much of 2016. Going forward, the surveyed banks continue to maintain their forecast that 2 year yields are expected to increase, and some to a significant degree. Notably, RBC and Scotiabank expect steep increases to the Canadian 2 year government bond to yield 1.85% and 1.75% by 2017 year end respectively, which are over three times higher than current yields. In the United States, Scotiabank forecasts the 2 year government bond to yield 2.70% for the same time period, nearly 2% higher than where it sits currently.


Ten year bond yields reverse sharply; expect rising yields

The 10 year bond yields slipped in both Canada and the U.S. to fresh lows of 1.12% and 1.68% respectively since last month’s report. This slide in yields has prompted several of the reporting banks to revise down their forecasts. National writes that in their base case scenario, they see the Alberta wildfires putting around a tenth of a percentage point dent in Canada’s 2016 GDP. Although this is not enough to prompt significant revisions in their interest rate forecast, it did warrant a marginal revision to the Canadian 10 year yield. Despite the revision and new lows, a consensus expectation remains amongst the reporting banks that 10 year yields will rise through 2017, in both Canada and the U.S.


Long bond yields slide further; rising environment ahead

Canadian and U.S. long bond yields reached recent lows, slipping further to 1.79% and 2.48% respectively. Many of the surveyed banks have as a result revised down their long bond yield expectations to reflect the new economic realities, but continue to maintain a consensus that yields will rise throughout both 2016 and 2017. RBC was one of the few banks to maintain its forecast over last month that the Canadian and U.S. long bond yield will be 3.20% and 3.75% by the end of 2017, a forecast that now looks even more optimistic under the current yield curve.

In addition to our survey of bank forecasts, Richter is also monitoring international developments as they relate to tax transparency. For summary of recent measures taken by select countries to combat tax evasion, read our latest article, as it appears on Bloomberg BNA:

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