Richter survey of bank forecasts: Foreign exchange and interest rates

September 2016

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CAD: Forecasts widen with increased uncertainty over global growth

Expecting the global economic recovery to propel the Canadian export sector, Laurentian Bank sees robust Canadian economic activity sufficient to move the USD/CAD to 80¢ by the end of the year and 83¢ by the end of 2017. Other survey participants are not as optimistic, most seeing the USD/CAD muted by competing USD appreciation in light of their anticipation of the US Federal Funds Rate increases. On the pessimistic side, CIBC is now calling for 73.0 US¢/CAD by 2017 year end, as they see anemic Canadian capital spending plans that reveal that the cheaper Canadian dollar isn’t yet strong enough to offset sluggish global growth.  

A soft Euro with accommodative ECB monetary policies

The Eurozone reported 1.1% annualized real growth rate and 0.2% annual inflation rate for the month of August. Geopolitical tensions paired with unfavorable economic data in the Eurozone have led some surveyed banks to lower their expectations through December 2017 for the Euro this month. National stated that, with governments showing little urgency to act and long-term inflation expectations falling to record lows, more monetary easing can be expected from the ECB going forward, including targeted loans to banks and an increase in the size of the ongoing asset purchases. According to National, this should keep bond yields low and the Euro under pressure.

Fed hikes expected; Bank of Canada may raise as early as 2017Q4

On August 26th, Janet Yellen, Chair of the Federal Reserve, declared that the recent performance of the labor market and their outlook for economic activity and inflation are giving more and more traction to the prospect of a hike in the Fed rate. Although inflation currently remains below target, the Fed is optimistic that it will soon be able to achieve its inflation target as the U.S. economy continues to rebound. CIBC, Scotiabank, BMO and National are predicting a December rate-hike, whereas Desjardins mentions that the uncertainty in international economic conditions could push the Fed to hold off until March 2017. The Bank of Canada released a statement on September 7th announcing that it expects the Canadian economy to bounce back in the third quarter supported by the recovery of oil production, rebuilding in Alberta following the wildfires, and with an expected boost in consumer spending. Further, the Bank of Canada committed to maintain its current monetary policy and is expected to do so until improvement in exports is seen. In this month’s survey, most of the banks expect the overnight rate to remain at 0.5% through 2017, with BMO and National calling for a hike for the fourth quarter of next year.

2 year government bond yields to rise as economic outlook brightens

The surveyed banks continue to anticipate the 2 year government bond yields to rise through 2017 as economic conditions generally improve. Scotiabank, who revised upward their Canadian and U.S. forecasts, spoke of a robust job market, rising income gains, low gasoline prices, low borrowing costs, growth in consumer spending and housing activity. Additionally, in Canada, strengthening U.S. demand and the lagged effects of a cheap Loonie are expected to lead to improvement in exports and manufacturing production for Canada, thereby spurring economic growth. The remaining reporting banks left their forecasts relatively intact, with a gradual rise in yields from current levels.

10 year government bond yields to rise through 2017

Overcoming the challenges of the second quarter, the Canadian economy has itself plenty of running room to sustain a strong third quarter rebound. Although, the yields on 10 year government bonds in both Canada and the U.S. have trended downward for nearly a year, they have rebounded over their last month lows and currently sit at 1.20% and 1.61% respectively. The consensus amongst the banks remains that a further drop in 10 year government bond yields from current levels is unlikely, as yields are expected to rise through 2017 as the economy improves.

Long bond yields start to pick up and continue to rise

As of September 15th, the Canadian and U.S. long bond yields traded at 1.84% and 2.48% respectively, showing that yields started to pick up from the historically low levels observed in July and August. According to National’s narrative this month, Canada AAA bonds are in a favorable environment as more stringent financial regulations have been put in place following the financial crisis, thus the demand for safe assets will remain high. In the U.S., economic data continues to support signs of an economic recovery. The overall consensus of the reporting banks remains that long bond yields will continue to rise through 2017.

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