Richter survey of bank forecasts: Foreign exchange and interest rates

November 2016

Rising crude oil prices fail to lift CAD as Greenback surges

The CAD’s correlation with crude oil prices is well-documented, but despite the price of a barrel of crude rallying over 30% by mid-October from August lows, the Loonie still managed to lose some ground against a surging Greenback. This comes at the same time that U.S. election results were being digested by markets. Both CIBC and National Bank stated that the Bank of Canada’s lower-than-expected Canadian domestic demand has also suppressed the strength of the Loonie. In their recent publications, CIBC was forecasting that the CAD would breach 72 US¢ per CAD by 2017Q1, whilst BMO lowered their 2017 forecasts. Meanwhile, Scotia was the most optimistic of the reporting group, forecasting the CAD to strengthen against the USD on the heels of their forecast of an increase in the Bank of Canada’s overnight rate, which they expect to bring momentum to the CAD by the end of 2017.

CAD-EUR relationship becomes more important as CETA signed into effect

National Bank comments that Eurozone economic growth is still weak, with monetary policy seemingly having reached its limits and loose ECB policies are no match for deteriorating demographics restraining demand and inflation. They further added that negative interest rates aren’t sufficiently stimulating the economy. CIBC believes that the upcoming ECB meeting in December will play an important role in determining future course of the currency. However, the forecasts remain divided as evidenced by the wide range presented by the surveyed banks. Although the EUR/CAD currency forecasts lack consensus, a competitive CAD may create opportunities for increased trade with the Eurozone, in particular as Trudeau’s signing of the Comprehensive Economic and Trade Agreement (CETA) on October 28th in Brussels kicks into effect.

Fed holds steady but reaffirms intention to lift; Bank of Canada to remain on sidelines

Economic commentary released by Canada’s monetary authority on October 19th showed increased desire for hastening Canadian economic activity. The Bank of Canada shrugged off improving data and even stated that it actively discussed cutting interest rates in October. Despite this, the surveyed banks do not expect for the Bank of Canada to engage in any monetary easing soon, as their forecasts largely anticipate the Bank of Canada to remain on the sidelines. Should the Loonie remain under pressure, increasingly attractive export opportunities should continue to present themselves south of the border to Canadian businesses. In the U.S., as widely expected, the Fed decided to leave the federal funds rate unchanged at their meeting on November 2nd. However, the monetary authority signaled that the case for an increase in the federal funds rate continues to strengthen as the economy gathers momentum, employment gains persist, and inflation picks up. The forecasts of the reporting banks are in-line with the Fed’s guidance as all banks expect a steady pick up in the federal funds rate through 2017.

U.S. 2 year yields rise, Canadian 2 year yields fall; as pre-election economic prospects weigh

U.S. 2 year government bond yields have risen on the heels of the Trump victory and reflecting the expectation of Fed tightening in December. Notably, RBC upwardly adjusted their forecasts of the yields in 2017 by10 to 15 bps. On the Canadian side, given the economic headwinds expressed by Bank of Canada; BMO, National Bank and Desjardins revised down their 2 year Canadian government bond yields expectations. As mentioned by BMO, the Bank of Canada is waiting to see whether the economy gains traction from fiscal stimulus and a resurging post-election U.S. economy, which would both spell positives for Canadian exports.

10 year government bond yields soar after Trump victory

When the forecasts of surveyed banks were published, polls were predicting that Hillary Clinton would be the next U.S. President. Thus, the forecasts presented here do not fully incorporate the Trump election victory, and that result has had a significant impact on markets presently. The yield on the benchmark 10-year Treasury had its biggest one-day increase since July 2013, traded at 2.15% following the election. According to CIBC, a Trump outlook gives inflationary pressure to the market – which in turn pressures yields higher. With this unexpected impact on bond markets yet to be reflected in the banks’ forecasts, we watch for revisions in next month’s survey.

Long bond yields no exception, as Trump victory fuels yields

The sudden increase in yields wasn’t limited to the 10 year government bonds, as the yield on U.S. 30 year government bonds soared to 2.94% as of November 10th. While investors are waiting for the specifics on how Trump is going to "Make America Great Again", the focus in the bond market has quickly shifted to his promises to boost spending and cut taxes, which is expected to add upward pressure on bond yields. This rise was also reflected in Canadian long bond yields. With the acknowledgement that the US presidential election result has not yet been fully reflected in the forecasts presented here, the surveyed banks still maintain the consensus that the long bond yields will continue to rise through 2017 in both Canada and U.S.

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