Richter survey of bank forecasts: Foreign exchange and interest rates

June 2018

USD gains versus CAD amidst burgeoning trade dispute
At time of writing the CAD traded at 75.9 US¢/CAD, its lowest level since last June. The struggle of the CAD is in part attributable to the increased uncertainties surrounding trade relationships largely involving Canada, Mexico, the U.S. and China. Canada’s trade tensions with the U.S. have deteriorated, with the two trade partners currently in a state of pause regarding NAFTA negotiations and with U.S. imposing tariffs on the steel and aluminum, to which Canada responded with similar tariff countermeasures. The situation was further escalated following the G7 meeting in Quebec, Canada, where President Trump floated the idea for tariffs on autos at the rate of 25 per cent, to which Canada is said to be preparing additional retaliatory tariffs should that occur. BMO highlighted that the potential tariffs to be imposed on imported vehicles in Canada could further negatively affect the Loonie. With these recent economic developments, CIBC is also showing caution regarding its forecasts, revising lower its expectations relative to as reported last month. Overall, the reporting banks expect the Loonie to trade between 77.0 and 81.0 US¢/CAD, generally lower than anticipated last month but still above current levels.

ECB to end QE program by December 2018

As noted by BMO, the forecast for the EUR has begun to stabilize as Draghi indicates the quantitative easing (“QE”) program will end later this year. This would reduce monetary stimulus and place upward pressure on the EUR. At the June 14th policy meeting, the ECB added that “rates would stay at present levels at least through the summer of 2019,” thereby moderating any meaningful upside to the currency for the time being. As highlighted by National Bank, Europe’s ongoing political uncertainties, such as Italy’s new populist government, have impacted the ability of the ECB to reach it’s 2% inflation target. The surveyed banks expect the EUR¢/CAD to trade between 58.3 and 65.9 through 2019, but caveat that uncertainties in the political environment cloud the outlook.

BoC holds, Fed moves higher; both central banks signal future increases on horizon
The Bank of Canada (“BOC”) interest rate kept its policy rate unchanged at 1.25%, but signaled that data suggests that hikes on July 11 and October 24 meeting are likely. As expected in previous publications, the Federal Reserve has also signaled a raise by 25 basis points. This is the highest target range reached since 2008’s global crisis as emphasized by BMO. National claims that “U.S. economic indicators remain consistent with economic growth well above potential in 2018” and that the GDP should reach 2.8% this year. Overall the consensuses amongst the surveyed banks are similar in regards to the expected hikes between the BoC and Federal rate for the next two quarters of 2018.

2 year bonds remain stable for now in U.S. and Canada
The 2 year Canada and U.S. government bond forecasts have remained relatively stable over the past month. TD suggests that the 2 year yield will usually spike when the policy rates have stopped increasing, which they expect to occur within the next few months. BMO is the only surveyed bank which has slightly decreased its rate-outlook for 2019, and that decrease was only on U.S. bonds. Overall, the surveyed banks are forecasting that through 2019, the 2 year Canada bond will yield between 2.3% and 2.7% and the U.S. bond will yield between 3.0% and 3.6%.

10 year bond yields to rise in the U.S., Canadian comparable bonds to remain relatively stable
As noted last month, the U.S. 10 year government bond-yield rose to its highest since 2011, touching 3.1% intra-day. BMO has increased their 10 year government yield forecast, highlighting that it expects linear upward traction until other factors such as stabilization of policy rates, strengthening of balance sheets and financing of budget deficits have settled. Forecasts for the 10 year Canadian government bond-yield have been stable for the end of 2018, staying around 2.5%. Overall, the 10 year government bonds are forecasted to yield between 2.6% and 3.1% in Canada and 3.2% and 3.8% in U.S. by the end of 2019.

Long term yield forecasts slightly down for Canada; unchanged for the U.S.
Compared to last month’s forecast, the long term bond yields saw minor downward revisions by the surveyed banks. National states that the Canadian 30 year government bond yields should remain low unless inflation increases significantly. TD highlights that the flatter yield curve is normal given the recent increase of rates and expectations of more hikes to come. Overall, and consistent with previous publications, the forecasting banks are in consensus that the long term bond yields will slowly increase through 2019. BMO is on the high end of Canada forecasts with 3.20% by the end of 2019, while RBC is calling for 3.85% by end of 2019.






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