Richter survey of bank forecasts: Foreign exchange and interest rates

May 2018

Loonie dips against stronger Greenback

The U.S. dollar rallied in the past four weeks to reverse several months of weakness, pushing the U.S. dollar index (“DXY”) to fresh 2018 highs. Among attributing factors is President Trump’s decision to pull out of the Iran nuclear deal, which contributed to oil prices rising to their highest levels since the beginning of 2015. In Canada, National wrote that the Loonie remains much weaker than levels that would typically be associated with current oil prices, attributing this to a dovish Bank of Canada (“BoC”) and uncertainties surrounding NAFTA negotiations. Desjardins added that a continuing gradual rise in interest rates is intensifying concerns over high household debt, which could trigger a sharper housing market correction than forecast.

Regarding the United States, on May 17, the deadline to reach a NAFTA deal passed, which was followed by a comment from the U.S. Treasury Secretary Steven Mnuchin stating that “there are still some very significant, open issues.”[1] National commented that the USD could get a temporary lift, but it could struggle on account that the flattest yield curve in over a decade is restricting the Fed’s ability to tighten policy. Furthermore, Desjardins adds concerns surrounding political uncertainties, protectionist moves and possible reprisals by the White House. As at the date of publication, the currency pair is trading at 77.6 US¢/CAD and is forecasted to trade between 77.0 and by 81.7 US¢/CAD by end of 2019.

Euro suffers by growth slowdown, and threat of protectionism growing

The Eurozone countries experienced “some moderation in growth or loss of momentum” in the past weeks, as acknowledged by Draghi at a press conference.[2] BMO highlights that the ECB is likely feeling some regret dropping its easing bias in March as the region’s economy has slowed, adding that inflation remains stubbornly lackluster. National expects monetary policy to remain loose at least until growth picks up and downside risks (e.g. trade protectionism) dissipate. As such, National continues to expect the Euro to bounce back in the second half of the year under a favorable economic currency climate. Overall, the general consensus amongst the surveyed banks is for the Euro to rally against the Loonie, forecasting the pair to trade anywhere between 58.3 and 63.8 EUR¢/CAD by the end of 2019, versus 66.4 EUR¢/CAD at time of publication.

BoC and Fed to further hike

The market will be paying close attention to the actions and rhetoric of the Bank of Canada during its scheduled interest rate announcement. Scotiabank thinks a hike at this stage would be premature given Governor Poloz’s admitted desire to move rates very gradually. Notably, RBC downwardly adjusted its overnight forecast by 0.25% across the board through to Q1 2019, reflecting a reduction in expectations of the Bank of Canada maintaining its current pace of planned rate hikes.

Regarding the United States, BMO still forecasts the Fed to raise policy rates another three times this year, while Scotiabank and National shifted expectations to spread the planned rate increases over a longer time-horizon, leaving the total number of hikes unchanged. Overall, and consistent with last month’s forecast, the banks are in consensus that the policy makers in Canada and the U.S. will continue to raise rates through 2019.

Rising yields; U.S.-Canada yield spread to remain wide through 2019

Notably, the 2 year U.S. government bond yield reached a high of 2.56% on May 15th, its highest level since 2008, whereas comparable rates in Canada moderated. The Canadian 2 year government bond yield forecasts saw minor upward adjustments since last month’s publication, indicating a slight increase in the reporting banks’ expectations of higher rates in Canada. National highlighted that they expect the Fed to be more aggressive than the BoC in 2019, and consequently expect the Canada-U.S. spread of 2-year yields to remain wide over this period. Overall, the surveyed banks are in consensus as to the upward trend of the 2 year government bond yields in the U.S. and Canada. Collectively, they expect 2 year government bonds to yield between 2.3% and 2.6% in Canada, and between 2.8% and 3.6% in the U.S. through 2019.   

U.S. 10 government bond yield reaches recent highs

The U.S. 10 year government bond yield has finally tested the 3% level, and rose to 3.1% on May 18, the highest point since 2011. TD highlights that economic fundamentals suggest it can edge higher but they are expecting it to settle around 3.15% by year-end. CIBC attributes their target increase for the U.S. and Canada to the pressure from the large U.S. fiscal deficits and the unwinding of central bank balance sheets ahead, as well as higher inflation expectations. RBC is on the high-end amongst the surveyed banks in Canada and the U.S., forecasting the 10 year government bond to reach 2.75% and 3.30% respectively by year-end. Overall, since last month, the surveyed banks made upward adjustments to both the Canadian and the U.S. 10 year government bond yield expectations.

Long bond yields upwardly adjusted in both Canada and the U.S.

On May 18, the U.S. long bond yields rose to their highest point since October 2014 (3.3%), on the heels of solid economic data and improving economic fundamentals. CIBC is forecasting Canada’s long term bond yields to remain steady, with Canada-U.S. yield spreads to remain around current levels, but with the potential to narrow. Overall and consistent with April publication, the expectations of an upward trend for the Canadian and the U.S. long bond yields remains intact through 2019.


















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