Richter survey of bank forecasts: Foreign exchange and interest rates

October 2016

Low oil prices and competitive Loonie signal Canada should look to exports; says CIBC

Since August of this year, crude oil has rallied about 25% to 50 USD/barrel, while the Loonie, despite its historically observed correlation with crude oil prices, remained at around 76 US¢ per CAD over this same time frame. With oil at this level, CIBC believes that the Canadian economy will rely on a soft Canadian dollar to support exports in fueling economic growth. While certain governments and organizations such as OPEC continue to make efforts to curb energy supply, energy prices remain low by recent historic standards, and the Loonie is trading at its lowest levels in over a decade compared to the Greenback. As such, with low energy prices, an uncharacteristically cheap Loonie, and a strengthening U.S. economy, the conditions remain ripe for Canadian exporters.

Reviewing the surveyed banks’ forecasts, the general consensus is for the CAD to remain weak through 2017. Notably, RBC and Desjardins, the most optimistic of the surveyed banks on the forecasted strength of the CAD in both last and this month’s publication, lowered their expectations for the CAD across the forecast horizon. The remaining surveyed banks left their forecasts relatively unchanged.

Surveyed banks remain divided on future value of EUR/CAD

According to National, the European Central Bank (“ECB”) seems unable to stimulate its stagnant economy despite its accommodative monetary efforts. Not only is demand weak, but negative interest rates appear to be doing more harm than good in an already weakened European banking sector. Despite the commentary, National revised its forecast over last month to reflect a stronger EUR relative to the CAD at all forecast points. National is joined by Desjardins and RBC in revising its forecasts to reflect a relatively stronger EUR, with Desjardins adding that the uncertainty surrounding Brexit should make itself felt more deeply further in 2017.

Bank of Canada to on hold; FOMC: Rate hikes coming

According to CIBC, Canadian Q3 data have been healthy enough to suppress talk of a Bank of Canada rate cut, but it will take a December U.S. Fed rate hike to put such risks to bed. CIBC, in line with the remaining surveyed banks sees the overnight rate in Canada unchanged through 2017. The exception here is National, who continues to anticipate a single hike by 2017 year end, however adding that the Bank of Canada is persistently dovish in their statements.

On September 21st, the Federal Open Market Committee (“FOMC”) stated that with continued strengthening of the labor market and growth in economic activity, the case for a Fed rate hike before year-end has strengthened. As for the time being, until target inflation of 2.0% is reached, the FOMC will likely maintain its current monetary policy in order to sustain growth in the labor market. This guidance aligns with the forecasts made by the surveyed banks last month, and the consensus forecast amongst the surveyed banks remains that a gradual hike in the Federal Funds Rate will follow through 2017.

U.S. 2 year government bond yields drift up on strengthening U.S. economy

The surveyed banks’ forecasts of Canadian 2 year government bonds yields remain mostly unchanged as the economy is still waiting for fiscal stimulus to kick in. Generally, the consensus amongst the surveyed banks remains that the current mix of fiscal and monetary stimuli will support the economy. As of October 11th, the U.S. 2 year government bond yields traded at 0.87%, having increased by 0.20% from July lows. A combination of indicators helped push up the 2 year government bond yields in mid-September, including: falling weekly jobless claims, new highs in job openings and solid Q3 GDP growth. BMO, National and Desjardins revised upward certain forecasts, indicating a positive expectation on the strengthening of the U.S. economy, despite the impending uncertainty surrounding the presidential election.

10 year government bond yields to rise, National expects up and down

The Canadian economy has been going through significant structural adjustments due to persistently lower commodity prices. Since July 15, 2015 when the overnight rate was last trimmed by 25 bps, the Bank of Canada has remained on the sidelines and kept its policy stance largely unchanged and accommodative. Recently, upbeat economic indicators, including an improved trade balance and a surged employment helped push the 10-year Canadian government bond to 1.20%, up 18 bps from August. The general consensus amongst the surveyed banks is that yields should pick up through 2017. In the U.S., the reporting banks continue to expect the 10-year U.S. government bond yield to rise.

Canadian and U.S. long bond yields revised upward and to rise through 2017

This month BMO and National made minor upward adjustments to their forecasts of both Canadian and U.S. long bonds, reflecting an optimistic outlook towards North American economy in the long term. Regarding Canadian yields, fiscal stimulus and improving exports were referenced. While for the U.S., optimism came from upbeat job growth figures and household spending.

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